Self-Check Questions

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 large increase in the price of the homes people own.
• Rapid growth in the economy of a major trading partner.
• The development of a major new technology offers profitable opportunities for business.
• The interest rate rises.
• 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 tax increase on consumer income.
• A surge in military spending.
• A reduction in taxes for businesses that increase investment.
• 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 25.6.

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 25.6.

5. How would a decrease in energy prices affect the Phillips curve?

6. Does Keynesian economics require government to set controls on prices, wages, or interest rates?

7. List three practical problems with the Keynesian perspective.

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