Great Depression – Principles of Macroeconomics Quiz 27

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Keynesian Economists, Great Depression, Great Recession, Principles of Macroeconomics

The key words in this Macroeconomics course include Keynesian Economists, Great Depression, Economy, Graphs, Classical Economists, Great Recession, Principles of Macroeconomics Quiz.

Identify which of the following graphs will be drawn by classical and Keynesian economists, respectively, for an economy experiencing a decrease in wealth. Note that E1 and E2, respectively, are the initial and final equilibrium points before and after the wealth decrease.

Classical: Fig 4; Keynesian: Fig 1

Classical: Fig 1; Keynesian: Fig 2

Classical: Fig 2; Keynesian: Fig 3

Classical: Fig 2, Fig 4; Keynesian: Fig 1, Fig 3

Explanation : The economy experiences a decrease in wealth. This implies that the AD curve should shift left, irrespective of the classical or Keynesian point of view. Hence, we can exclude figures 2 and 3, since both these figures involve a rightward shift of the AD curve. According to classical economists, the economy is self-correcting and always ends up at full-employment output. So in classical economics, demand shifts only involve changes in the price level, with output being at the full-employment level. This is the case as shown in Figure 4. On the other hand, Keynesian economists hold the view that aggregate demand changes bring fluctuations to the economy and therefore demand shifts can result in equilibrium situations in which the real GDP drifts away from potential GDP. This is the case depicted in Figure 1.

If a Keynesian economist was offering policy advice to stimulate an economy, which of the following would apply?

reduce unemployment benefits for 6 months

reduce licensing requirements for cosmetologists.

let the economy work itself out, without any government action

create a program that would fix and repair existing infrastructure and highways

Explanation : An infrastructure program designed to fix infrastructure is a direct injection of money into the economy by the government. This program also creates jobs to lower the unemployment rate. This type of policy directly increases aggregate demand, and is the underlying principle behind Keynesian economics.

Which of the following explains why the Great Depression was so much worse than the Great Recession?

The decline in real GDP during the Great Depression was nearly 60%, and the decline during the Great Recession was about 25%

With the Great Recession, the economy took more than seven years to return to pre-recession level, and the Great Depression took 14 years to return to pre-depression levels

At its worst, the highest unemployment rate was 25% during the Great Recession, but during the Great Depression, the unemployment was highest at 10%

The Great Recession lasted only 18 months, whereas the Great Depression lasted about four years

Explanation : With the Great Recession, the economy took more than 4 years to return to pre-recession levels, and with the Great Depression took more than 7 years to return to pre-Depression levels. The decline in real GDP during the Great Depression was 30% and the decline in GDP during the Great Recession was about 5%.

Which of the following is a reason the 2007–2009 recession came to be known as the Great Recession?

The atmosphere of the country was one of celebration despite stress in the financial markets.

There was noticeable stress in financial markets.

It was greater in length of all the recessions that had occurred since the Great Depression.

The effects of the Great Recession, in terms of both high unemployment rates and slow real GDP growth, were drastic but short-lived.

Explanation : Real GDP fell by an annual rate of 8.9% in the fourth quarter of 2008. The downturn in the financial markets made the downturn similar to that aspect of the Great Depression. If you look at business cycle dates, you will see that the length of the Great Recession was not longer than all previous ones combined.

Which of the following led to the Great Recession?

a rise in AD but a decline in LRAS

a decline in both AD and LRAS

a decline in AD

a decline in LRAS

Explanation : The financial crisis that caused the Great Recession led to a permanent breakdown in the loanable funds market, resulting in reduced funding opportunities for investment for the firms, which reduced the long-run aggregate supply. At the same time, large declines in consumer wealth contributed to a significant decline in aggregate demand.