(L6) Sandmo Chapter 15

Question 1

What distinction did traditional economics often overlook?

Answer 1

Traditional economics did not strongly distinguish between microeconomics and macroeconomics.

Question 2

What was the classical view on market forces?

Answer 2

The classical view was that market forces would correct issues like unemployment through wage adjustments in the long run.

Question 3

How did Keynes change the view on macroeconomics in the 1930s?

Answer 3

Keynes focused on aggregate demand and its role in unemployment and inflation, forming the basis for macroeconomic theory.

Question 4

What were Keynes’ early works?

Answer 4

‘A Treatise on Probability’ contributing to probability theory and ‘The Economic Consequences of the Peace’ regarding post-WWI reparations.

Question 5

What did ‘The General Theory’ argue for?

Answer 5

A more active role for government in stabilizing the economy through public spending and taxation.

Question 6

How did Keynes view the role of government during economic downturns?

Answer 6

He emphasized that government intervention could help achieve full employment during downturns.

Question 7

What did Keynes challenge about wage and price adjustments?

Answer 7

He challenged the notion that wage and price adjustments could ensure full employment, suggesting government action could remedy demand failures.

Question 8

What did Keynes critique about classical economics on labor and wages?

Answer 8

He argued that classical theory fails to account for involuntary unemployment due to nominal wage rigidity.

Question 9

What principle explains how investment increases can amplify income and consumption?

Answer 9

The ‘investment multiplier’ principle.

Question 10

What does the investment multiplier depend on?

Answer 10

The magnitude of the investment multiplier effect depends on the marginal propensity to consume.

Question 11

How did Keynes’ theory differ from classical economics regarding investment and interest rates?

Answer 11

Keynes emphasized the sensitivity of investment demand to interest rates, in contrast to the classical view.

Question 12

What was Keynes’ perspective on the role of money in economic policy?

Answer 12

He was skeptical about the efficacy of monetary policy for macroeconomic stabilization.

Question 13

What policy did Keynes favor for economic stabilization?

Answer 13

He favored fiscal policy through public expenditure and taxation.

Question 14

What is the ‘Keynesian Revolution’?

Answer 14

A term capturing the sweeping change in economic thought precipitated by Keynes’ theories.

Question 15

What was Keynes’ influence on economic research?

Answer 15

He influenced the development of new theories and empirical research beyond his own contributions to theory and policy.

Question 16

How did Keynesian economics evolve postwar?

Answer 16

It faced criticism and evolved, with some directions leading back to pre-Keynesian ideas.

Question 17

What is notable about Keynes’ writings and contributions?

Answer 17

Keynes made wide-ranging contributions to economic literature and theory, including on current economic and political events.

Question 18

How original was Keynes’ work?

Answer 18

Keynes was a highly original thinker, and his ‘General Theory’ is considered one of the most influential works in economics.

Question 19

How did Keynes compare with other schools of thought?

Answer 19

Earlier economic theories had similarities with Keynesian ideas, but the Stockholm School, for instance, did not gain the same level of international prominence.