Practice
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4 of 7 have the textbook's official worked answer.
- 1
In the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers. a. A large increase in the price of the homes people own. b. Rapid growth in the economy of a major trading partner. c. Business confidence increases. d. The interest rate rises. e. The good imported from a major trading partner become much less expensive.
- 2
In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to recession? Which offer a possible solution to inflation? a. A tax increase on consumer income. b. A surge in military spending. c. A reduction in taxes for businesses that increase investment. d. A major increase in what the U.S. government spends on healthcare.
- 3
Use the AD/AS model to explain how an inflationary gap occurs, beginning from the initial equilibrium in Figure 12.6.
- 4
Suppose the U.S. Congress cuts federal government spending in order to balance the Federal budget. Use the AD/AS model to analyze the likely impact on output and employment. Hint: revisit Figure 12.6.
- 5
How would a decrease in energy prices affect the Phillips curve?
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- 6
Does Keynesian economics require government to set controls on prices, wages, or interest rates?
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- 7
List three practical problems with the Keynesian perspective.
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