Question 1

According to Keynes, what is the primary cause of economic downturns such as the Great Depression?

Accepted Answer

A lack of aggregate demand due to insufficient spending

Question 2

Which of the following best describes the 'paradox of thrift' as presented by Keynes?

Accepted Answer

Increased saving during a recession can reduce aggregate demand and slow economic recovery

Question 3

Hayek criticizes Keynesian aggregation by arguing that it:

Accepted Answer

Conceals the mechanics of change and ignores individual human action and motivation

Question 4

Suppose the government increases its spending by $$100 million, and the marginal propensity to consume (MPC) is 0.8. According to Keynesian theory, what is the total increase in output ($$\Delta Y$) using the spending multiplier formula?

Accepted Answer

$$\500$$	ext{ million}$

Question 5

Which of the following best represents the Keynesian aggregate demand equation as referenced in the lyrics?

Accepted Answer

$$Y = C + I + G + NX$$

Question 6

According to Hayek, what is the main danger of artificially low interest rates set by the central bank?

Accepted Answer

They lead to malinvestments by distorting price signals and the capital structure

Question 7

Keynes refers to 'animal spirits' in his theory. What does this term most closely refer to?

Accepted Answer

The unpredictable psychological factors that influence business and consumer confidence

Question 8

Hayek argues that the 'boom' phase of the business cycle is dangerous because:

Accepted Answer

It is fueled by credit expansion and leads to malinvestments that cause future busts

Question 9

If the central bank lowers interest rates to stimulate borrowing, but banks hold onto the new money instead of lending it out, which Keynesian concept does this illustrate?

Accepted Answer

Liquidity trap

Question 10

Which of the following scenarios best illustrates Hayek's concept of 'malinvestment'?

Accepted Answer

Low interest rates lead to a housing boom, followed by a crash when rates rise and projects prove unprofitable

Question 11

According to Keynes, what is the appropriate government response to a recession?

Accepted Answer

Increase government spending to boost aggregate demand

Question 12

Hayek criticizes government stimulus by arguing that it:

Accepted Answer

Leads to more debt and distorts incentives, worsening the business cycle

Question 13

If the marginal propensity to consume (MPC) is 0.75, what is the value of the Keynesian spending multiplier ($$k$$)?

Accepted Answer

$$k = \frac{1}{1 - 0.75} = 4$$

Question 14

Which of the following best describes the 'liquidity trap' as discussed by Keynes?

Accepted Answer

A situation where monetary policy becomes ineffective because people hoard cash and banks do not lend, even at low interest rates

Question 15

Suppose the government runs a budget deficit to finance stimulus spending. According to Hayek, what is a likely long-term consequence?

Accepted Answer

Higher debt levels and distorted market incentives, leading to future instability

Question 16

Keynes argues that 'in the long run, we are all dead.' What is the implication of this statement for economic policy?

Accepted Answer

Short-term stabilization policies are crucial because waiting for the market to self-correct can cause unnecessary suffering

Question 17

Which of the following best summarizes the Austrian (Hayekian) view of the business cycle?

Accepted Answer

Business cycles are driven by credit expansion and artificial interest rates, leading to unsustainable booms and inevitable busts

Question 18

If the government increases spending by $$\200$ million and the spending multiplier is 3$, what is the predicted change in output ($$\Delta Y$)?

Accepted Answer

$$\Delta Y = \600$ million

Question 19

Which of the following is a criticism Hayek makes of Keynesian stimulus policies?

Accepted Answer

They ignore the importance of real savings and distort the coordination of time and interest

Question 20

A government implements a large-scale public works program during a recession. According to Keynes, what is the expected effect on the economy?

Accepted Answer

It will increase aggregate demand and help the economy recover

Keynes vs. Hayek: Theories of the Business Cycle and Macroeconomic Policy

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