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Free CFA-Level-I Exam Braindumps (page: 333)

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Within the simple Keynesian model, when an economy operates below its long-run, full-employment output

constraint, an increase in aggregate demand will lead to an increase in

  1. real income.
  2. unemployment.
  3. prices.
  4. employment, output and prices, but real income will remain constant.
  5. interest rates and money income, but employment and real income will remain constant.

Answer(s): A

Explanation:

Keynes considered aggregate supply to be accommodative of aggregate demand. Thus, an increase in aggregate demand will stimulate aggregate output. The equivalence between output and income also suggests that real income will rise. Below the full employment capacity of the economy, increases in aggregate supply have little effect on the price level. This is the result of the Keynesian assumption that at less than full employment output levels, prices and wages are fixed since they are inflexible in a downward direction.



In the simple Keynesian model, if equilibrium output is less than the level required for full employment, what must happen for full employment to be achieved?

  1. Aggregate demand must fall.
  2. Interest rates must rise.
  3. Aggregate supply must increase.
  4. Prices must rise.
  5. Aggregate demand must increase.

Answer(s): E

Explanation:

When equilibrium output is less than the economy's capacity, only an increase in expenditures will lead to full employment. This is because under the Keynesian model, aggregate expenditures are considered the catalyst the change in output; that is, aggregate output is accommodative of aggregate expenditures.



In the Keynesian model, if the marginal propensity to consume were 0.75, an independent decline in investment of $10 billion would cause equilibrium income to decline ________.

  1. $40 billion
  2. $75 billion
  3. $10 billion
  4. $50 billion

Answer(s): C

Explanation:

The expenditure multiplier is found by M = 1/(1-MPC). Thus, here M = 1/(1-3/4) = 4. Therefore the $10 billion decrease in aggregate expenditures is magnified four times to $40 billion.



In year 1, the nation of Economica has no government debt, production is at potential, the nominal interest rate is 8.6% and the real rate is 5.2%. In year 2, the nominal rate is 11.1% and the real rate is 6.7%. Which of the following would be most likely to cause such a situation?

  1. Federal budget deficit
  2. Monetary expansion
  3. Recession
  4. Trade surplus
  5. Increase in aggregate supply

Answer(s): A

Explanation:

In this case, the real rate has increased, as well as the rate of inflation. This is most likely to be caused by a budget deficit. Deficit spending causes the real rate to rise due to government demand for debt. Inflation would also increase because government spending amounts to an increase in aggregate demand, which would shift the price level higher.






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