Module M04 Quiz: The Basic Keynesian Model
30 questions ยท Introductory ยท Mix of multiple choice, calculation, and short answer
How to use
Attempt each question before clicking Show Answer. For calculation questions, write out your working before checking.
Question 1
Lesson L01 ยท Fiscal Policy
What was Keynes's key critique of classical economics during the Great Depression?
Type: Multiple Choice
- A) Markets always clear quickly through price adjustments
- B) Government intervention always makes recessions worse
- C) Unemployment is voluntary
- D) Savings always equal investment
Show Answer
Answer: A) Markets always clear quickly through price adjustments
Keynes argued prices and wages are sticky downward, so markets don't quickly self-correct
Question 2
Lesson L01 ยท Fiscal Policy
Which of these is NOT a core Keynesian assumption?
Type: Multiple Choice
- A) Prices are sticky in the short run
- B) Output is demand-determined in the short run
- C) Markets always clear instantly
- D) Government can stabilize aggregate demand
Show Answer
Answer: C) Markets always clear instantly
Keynes rejected the classical view that markets always clear instantly
Question 3
Lesson L01 ยท Consumption
If autonomous consumption is $500 and MPC is 0.8, what is consumption when income is $2000?
Type: Calculation
Show Answer
Answer: 2100
C = 500 + 0.8*2000 = 500 + 1600 = 2100
Question 4
Lesson L01 ยท Fiscal Policy
Explain in one sentence why Keynes advocated government spending during recessions.
Type: Short Answer
Show Answer
Answer: Because private demand is insufficient to restore full employment, requiring government to boost aggregate demand
Keynes argued recessions persist without government intervention due to demand shortfalls
Question 5
Lesson L01 ยท Fiscal Policy
If MPC increases from 0.75 to 0.85, what happens to the multiplier?
Type: Multiple Choice
- A) It decreases
- B) It stays the same
- C) It increases
- D) It becomes negative
Show Answer
Answer: C) It increases
Multiplier = 1/(1-MPC), so a higher MPC means a larger multiplier
Question 6
Lesson L02 ยท Consumption
What does the slope of the consumption function represent?
Type: Multiple Choice
- A) Average propensity to consume
- B) Marginal propensity to consume
- C) Autonomous consumption
- D) Total consumption
Show Answer
Answer: B) Marginal propensity to consume
The slope is ฮC/ฮY, which is the MPC
Question 7
Lesson L02 ยท Consumption
If MPC is 0.9 and income rises by $1000, how much does consumption increase?
Type: Calculation
Show Answer
Answer: 900
ฮC = MPC ร ฮY = 0.9 ร 1000 = 900
Question 8
Lesson L02 ยท Consumption
Define marginal propensity to consume (MPC).
Type: Short Answer
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Answer: The fraction of additional income that is spent on consumption
MPC measures how consumption changes with income
Question 9
Lesson L02 ยท Consumption
If C = 200 + 0.8Y and Y = 1000, calculate saving.
Type: Calculation
Show Answer
Answer: 0
C = 200 + 800 = 1000; S = Y - C = 0
Question 10
Lesson L02 ยท Consumption
During COVID, why did Australia's saving ratio surge?
Type: Multiple Choice
- A) People couldn't spend due to lockdowns
- B) The MPC increased dramatically
- C) Autonomous consumption fell
- D) Investment opportunities disappeared
Show Answer
Answer: A) People couldn't spend due to lockdowns
Lockdowns forced savings as consumption opportunities were restricted
Question 11
Lesson L03 ยท Fiscal Policy
In the Keynesian cross, equilibrium occurs where:
Type: Multiple Choice
- A) Output equals planned expenditure
- B) Savings equal investment
- C) The PE line is steepest
- D) Inventories are changing
Show Answer
Answer: A) Output equals planned expenditure
Equilibrium is Y = PE, where inventories are stable
Question 12
Lesson L03 ยท Fiscal Policy
If PE = 1000 + 0.8Y and Y = 5000, what happens if firms produce 5500?
Type: Multiple Choice
- A) Inventories rise by 500
- B) Inventories fall by 500
- C) Inventories rise by 100
- D) Inventories fall by 100
Show Answer
Answer: C) Inventories rise by 100
PE at Y=5500 is 5400, so output exceeds PE by 100
Question 13
Lesson L03 ยท Fiscal Policy
Calculate equilibrium Y when PE = 500 + 0.75Y
Type: Calculation
Show Answer
Answer: 2000
Y = 500 + 0.75Y โ 0.25Y = 500 โ Y = 2000
Question 14
Lesson L03 ยท Fiscal Policy
Explain the role of inventory changes in moving toward equilibrium.
Type: Short Answer
Show Answer
Answer: Unplanned inventory changes signal firms to adjust production until output matches demand
Rising inventories lead to production cuts, falling inventories lead to increases
Question 15
Lesson L03 ยท Fiscal Policy
What does the 45-degree line represent in the Keynesian cross?
Type: Multiple Choice
- A) Planned expenditure
- B) Output = expenditure
- C) Savings = investment
- D) Full employment
Show Answer
Answer: B) Output = expenditure
The 45ยฐ line shows all points where actual output equals actual expenditure
Question 16
Lesson L04 ยท Fiscal Policy
If MPC is 0.75, what is the spending multiplier?
Type: Calculation
Show Answer
Answer: 4
k = 1/(1-0.75) = 4
Question 17
Lesson L04 ยท Fiscal Policy
A $10 billion increase in G with MPC=0.8 raises equilibrium Y by:
Type: Multiple Choice
- A) $8 billion
- B) $10 billion
- C) $40 billion
- D) $50 billion
Show Answer
Answer: D) $50 billion
k=5, so ฮY=5ร10=50
Question 18
Lesson L04 ยท Fiscal Policy
Trace the first 3 rounds when ฮG=100 and MPC=0.6
Type: Short Answer
Show Answer
Answer: Round1:100, Round2:60, Round3:36
Each round spends 60% of the previous round's income
Question 19
Lesson L04 ยท Fiscal Policy
Why are real-world multipliers smaller than 1/(1-MPC)?
Type: Short Answer
Show Answer
Answer: Due to taxes, imports, and crowding out
Not all income is respent domestically
Question 20
Lesson L04 ยท Fiscal Policy
The 2009 Australian stimulus had a multiplier around 1.5 because:
Type: Multiple Choice
- A) MPC was very low
- B) Much spending leaked to imports
- C) It was mostly tax cuts
- D) People saved all of it
Show Answer
Answer: B) Much spending leaked to imports
Open economies like Australia have lower multipliers due to import leakage
Question 21
Lesson L05 ยท Fiscal Policy
A recessionary gap exists when:
Type: Multiple Choice
- A) Y* > Y_fe
- B) Y* < Y_fe
- C) PE > Y
- D) PE < Y
Show Answer
Answer: B) Y* < Y_fe
Recessionary gap means actual output is below potential
Question 22
Lesson L05 ยท Fiscal Policy
If Y_fe=2000, Y*=1800, and k=4, required ฮG is:
Type: Calculation
Show Answer
Answer: 50
Gap=200, ฮG=200/4=50
Question 23
Lesson L05 ยท Fiscal Policy
Why can't the economy self-correct from a recessionary gap?
Type: Short Answer
Show Answer
Answer: Because prices/wages are sticky downward
Keynes argued adjustment is slow without policy help
Question 24
Lesson L05 ยท Fiscal Policy
An inflationary gap requires:
Type: Multiple Choice
- A) Higher G
- B) Lower taxes
- C) Lower G
- D) Higher I
Show Answer
Answer: C) Lower G
Contractionary policy reduces PE to close inflationary gap
Question 25
Lesson L05 ยท Fiscal Policy
If MPC=0.8 and inflationary gap=100, required ฮG is:
Type: Calculation
Show Answer
Answer: -20
k=5, so ฮG=-100/5=-20
Question 26
Lesson L06 ยท Fiscal Policy
Which is NOT autonomous spending?
Type: Multiple Choice
- A) Government purchases
- B) Planned investment
- C) Consumption from wealth
- D) Induced consumption
Show Answer
Answer: D) Induced consumption
Induced consumption depends on Y, making it non-autonomous
Question 27
Lesson L06 ยท Fiscal Policy
If autonomous consumption rises by $20B and k=4, ฮY is:
Type: Calculation
Show Answer
Answer: 80
ฮY=kรฮA=4ร20=80
Question 28
Lesson L06 ยท Fiscal Policy
How can local councils act as stabilizers?
Type: Short Answer
Show Answer
Answer: By timing capital works to offset private demand fluctuations
Bringing forward projects in downturns, delaying in booms
Question 29
Lesson L06 ยท Monetary Policy
Monetary policy is preferred for stabilization because:
Type: Multiple Choice
- A) It's faster to implement
- B) It doesn't affect inflation
- C) Congress must approve it
- D) It works instantly
Show Answer
Answer: A) It's faster to implement
RBA can adjust rates monthly vs legislative delays for fiscal policy
Question 30
Lesson L06 ยท Fiscal Policy
If regional MPC=0.7 and gap=30M, required local spending is:
Type: Calculation
Show Answer
Answer: 9
k=1/0.3โ3.33, ฮG=30/3.33โ9