Question

5.         Answer True or False for each of the following.                                            5 pts each

A) The Keynesians claim interest rates have a powerful effect on savings since people mainly save to earn interest.

B) The Keynesians claim that wages and prices are “downward sticky”.

C)In the Keynesian model the velocity of money moves against GDP.

D) Government spending can raise Aggregate Demand and real GDP in the Keynesian model.

E) Keynesians believe that monetary policy is very powerful at moving real GDP.

F) The Keynesians felt that the Great Depression was caused by inadequate demand partly coming from the stock market crash and partly from a lack of income growth for most people.

G) Contractionary gaps are more common than expansionary ones in the Keynesian model.

Answer 1

5.A) According to Keynes savings are largely influenced by the interest rate. In depression, a reduction in interest rate has little effect on savings. In the time of recession, the economy faces a liquidity trap because of this influence. So the given statement is TRUE.

B) Keynes argues that to boost employment nominal wages have to fall more than prices. To move the economy towards natural rate of unemployment wages and prices are downward sticky. So the given statement is TRUE.

C) MV=PY. Where V=velocity, Y=GDP

So the velocity of money and GDP are proportionally related. When V increases, GDP will be increased. So the given statement is FALSE.

D) According to Keynes government must step in to boost aggregate demand and restore equilibrium. So the given statement is TRUE.