Question

According to the lecture slides, which of the following is true about John Maynard Keynes?

a. He hated economics

b. He believed the economy should be guided by markets and the government be kept out of the way

c. He thought that recessions did not really happen but were only imagined

d. He believed the long run means six months

e. He thought government spending would be useful during recessions to lift the economy

If the economy is in its initial equilibrium and then the Federal Reserve decides to reduce the money supply, what is the effect in the long run (relative to the initial equilibrium) on the purchasing power of money (using the AD-AS model)?

a. Increases

b. Decreases

c. Stays the same

d. Unclear

e. None of the above

Recall the trend over time of labor productivity increasing (because of technology advancement, increases in education, etc.). Given what the lecture slides say causes shifts in the LRAS curve, the LRAS curve would tend to shift right over time.

True

False

Answer 1

Option E is correct. He was a firm believer of government role in uplifting the economy during the time of recession. There is no long run for him and that is why government has to act change economy cannot resurrect itself

Option A is correct. In the short run the price level will decrease and real GDP will also decrease. In the long run when economy adjust itself price level will decrease further. this indicates that purchasing power of money will increase as price level is reduced

This is statement is false. there should be an increase in the labour productivity due to technological changes at a particular point of time and not over the time period.