Unit 5: Welfare Economics and Keynesian Economics - Practice Quiz

ECO103 — History Of Economic Thought 60 Questions
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1 What is the main objective of a consumer in neoclassical economic theory?

Neoclassical welfare economics: utility maximization and profit maximization Easy
A. To control prices
B. To maximize utility
C. To minimize production
D. To maximize taxation

2 What is the main objective of a firm in neoclassical economic theory?

Neoclassical welfare economics: utility maximization and profit maximization Easy
A. To minimize sales
B. To increase consumer utility
C. To maximize employment
D. To maximize profit

3 Utility is best described as the:

Neoclassical welfare economics: utility maximization and profit maximization Easy
A. Satisfaction from consuming a good
B. Price charged by a firm
C. Income earned by a worker
D. Cost of producing a good

4 Hedonistic welfare economics primarily connects welfare with:

Hedonistic foundations of welfare economics Easy
A. Government revenue
B. Human pleasure and satisfaction
C. International trade
D. Industrial production

5 According to the hedonistic view, an increase in individual pleasure generally indicates:

Hedonistic foundations of welfare economics Easy
A. A fall in welfare
B. A reduction in productivity
C. A rise in unemployment
D. An increase in welfare

6 The hedonistic approach to welfare mainly focuses on the experiences of:

Hedonistic foundations of welfare economics Easy
A. Government departments
B. Exporting firms
C. Central banks
D. Individual consumers

7 Piero Sraffa is well known for criticizing the neoclassical theory of:

Sraffa's critique of neoclassical theory Easy
A. Population growth
B. Foreign exchange
C. Public debt
D. Value and distribution

8 Sraffa's work questioned the treatment of capital as:

Sraffa's critique of neoclassical theory Easy
A. A fixed level of population
B. A single measurable factor
C. A form of consumer demand
D. A type of government tax

9 Sraffa's critique is closely associated with the problem of measuring:

Sraffa's critique of neoclassical theory Easy
A. Capital
B. Exports
C. Population
D. Money supply

10 Keynes's economic analysis mainly focused on the determination of:

Theoretical setting of Keynes analysis Easy
A. National income and employment
B. Only individual preferences
C. The size of the gold supply
D. Only agricultural prices

11 Keynes wrote his major work during a period strongly influenced by the:

Theoretical setting of Keynes analysis Easy
A. Oil boom
B. Industrial Revolution
C. Digital Revolution
D. Great Depression

12 In Keynesian analysis, aggregate demand is the demand for:

Theoretical setting of Keynes analysis Easy
A. Only imported goods
B. Only government buildings
C. All goods and services in an economy
D. Only luxury products

13 Keynes argued that an economy could experience unemployment because of insufficient:

Theoretical setting of Keynes analysis Easy
A. Population growth
B. Aggregate demand
C. Natural resources
D. Foreign investment

14 The marginal productivity theory explains the payment received by a factor according to its:

Keynes defense of marginal productivity theory of distribution Easy
A. Historical cost
B. Marginal product
C. Total population
D. Government ownership

15 According to marginal productivity theory, wages are mainly related to the marginal productivity of:

Keynes defense of marginal productivity theory of distribution Easy
A. Land
B. Money
C. Entrepreneurship
D. Labour

16 The marginal product of a factor is the additional output resulting from using:

Keynes defense of marginal productivity theory of distribution Easy
A. A new government policy
B. A fixed amount of money
C. One less unit of every factor
D. One more unit of the factor

17 Keynes explained capitalist depression mainly through a deficiency of:

Keynes's analysis of capitalist depression Easy
A. Population density
B. Natural rainfall
C. Gold production
D. Effective demand

18 During a capitalist depression, businesses typically reduce:

Keynes's analysis of capitalist depression Easy
A. Imports and taxes only
B. Population and education
C. Currency and land
D. Production and employment

19 Which policy is commonly associated with Keynesian demand management?

Efficacy of Keynesian policies Easy
A. Permanent wage reduction
B. Restriction of all investment
C. Expansionary fiscal policy
D. Reduction of public spending

20 An increase in government spending can raise aggregate demand by increasing:

Efficacy of Keynesian policies Easy
A. Private saving only
B. Total expenditure
C. Import restrictions only
D. The natural rate of unemployment

21 A consumer has utility , income of , and faces prices and . Which bundle maximizes utility?

Neoclassical welfare economics: utility maximization and profit maximization Medium
A.
B.
C.
D.

22 A competitive firm maximizes profit by producing where which condition holds, assuming the solution is interior?

Neoclassical welfare economics: utility maximization and profit maximization Medium
A.
B.
C.
D.

23 If a consumer's marginal rate of substitution differs from the ratio of commodity prices at an interior bundle, what is the likely result?

Neoclassical welfare economics: utility maximization and profit maximization Medium
A. The consumer's income must immediately increase
B. The consumer has reached a utility maximum
C. The budget constraint has become vertical
D. The consumer can gain by reallocating spending

24 In a hedonistic approach to welfare economics, an economic policy is considered beneficial primarily when it:

Hedonistic foundations of welfare economics Medium
A. Expands exports regardless of welfare
B. Increases the number of firms
C. Raises total pleasure or satisfaction
D. Reduces every market price

25 What major difficulty arises when welfare is assessed by adding individuals' utilities?

Hedonistic foundations of welfare economics Medium
A. Consumers cannot rank alternatives
B. Production always becomes constant
C. Prices cannot be observed in markets
D. Utilities may not be cardinally comparable

26 Suppose a policy raises the income of one person but lowers the income of another. Under a simple utilitarian criterion, the policy is desirable if:

Hedonistic foundations of welfare economics Medium
A. The income distribution remains unchanged
B. The sum of utilities increases
C. The richer person always gains
D. The poorer person always gains

27 Sraffa's critique of the neoclassical theory of value mainly challenged the idea that:

Sraffa's critique of neoclassical theory Medium
A. Markets contain exchange relationships
B. Commodity prices can be explained solely by supply and demand
C. Firms use productive inputs
D. Consumers make economic choices

28 Why did Sraffa emphasize the role of production conditions in the determination of relative prices?

Sraffa's critique of neoclassical theory Medium
A. Production methods influence input and output relationships
B. Demand is unrelated to prices
C. Consumer preferences are always identical
D. Money has no role in every economy

29 The reswitching problem poses a challenge to the neoclassical claim that:

Sraffa's critique of neoclassical theory Medium
A. A lower interest rate always implies a more capital-intensive technique
B. Capital goods have no effect on productivity
C. Demand determines every production technique
D. Higher wages always reduce total output

30 In Keynes's analysis, effective demand is best understood as the level of aggregate demand that:

Theoretical setting of Keynes analysis Medium
A. Includes only government purchases
B. Equals the economy's maximum possible output
C. Remains fixed at full employment
D. Determines firms' expected sales and employment

31 Why did Keynes reject the classical claim that a competitive economy automatically reaches full employment?

Theoretical setting of Keynes analysis Medium
A. Saving is always greater than investment
B. Prices are permanently fixed
C. Wages never change in the short run
D. Aggregate demand may be insufficient

32 If the marginal propensity to consume is , the simple spending multiplier is:

Theoretical setting of Keynes analysis Medium
A.
B.
C.
D.

33 Keynes's defense of marginal productivity theory was mainly directed at explaining:

Keynes defense of marginal productivity theory of distribution Medium
A. Why money balances have no value
B. Why aggregate demand never fluctuates
C. The relationship between factor rewards and productivity
D. Why unemployment is always voluntary

34 According to marginal productivity reasoning, a firm's demand for labor tends to increase when:

Keynes defense of marginal productivity theory of distribution Medium
A. The marginal revenue product of labor rises
B. The product price falls to zero
C. Labor's marginal product becomes negative
D. The wage exceeds labor's contribution

35 Which assumption is important for the traditional marginal productivity theory of distribution?

Keynes defense of marginal productivity theory of distribution Medium
A. All factors have identical productivity
B. Factors can be varied at the margin
C. Markets must always operate below capacity
D. Technology changes after every transaction

36 In Keynes's explanation of capitalist depression, a fall in investment can reduce income by more than the initial amount because of:

Keynes's analysis of capitalist depression Medium
A. A permanent rise in exports
B. The elimination of liquidity preference
C. The operation of the expenditure multiplier
D. An increase in the saving ratio only

37 A collapse in business confidence is likely to cause a depression in Keynes's framework because it directly reduces:

Keynes's analysis of capitalist depression Medium
A. The economy's natural resources
B. The depreciation rate of capital
C. Autonomous investment spending
D. The labor force's population

38 Why can a depression persist even when workers are willing to work at lower wages?

Keynes's analysis of capitalist depression Medium
A. Firms cannot respond to expected sales
B. Employment is independent of output
C. Lower wages may reduce consumption demand
D. Lower wages always increase investment

39 During a recession with idle resources, which fiscal policy is most directly expansionary?

Efficacy of Keynesian policies Medium
A. Increasing income taxes
B. Reducing government expenditure
C. Reducing transfer payments
D. Increasing government expenditure

40 If the spending multiplier is , an increase in autonomous expenditure of raises equilibrium income by:

Efficacy of Keynesian policies Medium
A.
B.
C.
D.

41 A competitive consumer has strictly convex preferences and faces prices and income . If an interior utility maximum satisfies , which additional condition is essential for interpreting the solution as a global maximum rather than merely a stationary point?

Neoclassical welfare economics: utility maximization and profit maximization Hard
A. The budget set must be strictly nonconvex
B. The marginal utilities must remain constant at all bundles
C. The utility function must be homogeneous of degree one
D. The preference relation must be locally nonsatiated and convex

42 Suppose a firm has production function that is concave but not strictly concave, and faces competitive factor and product markets. Which statement most accurately describes the relationship between profit maximization and the first-order conditions?

Neoclassical welfare economics: utility maximization and profit maximization Hard
A. The first-order conditions are necessary and sufficient for an interior maximum
B. The first-order conditions apply only when returns to scale are increasing
C. The first-order conditions guarantee a unique input combination
D. The first-order conditions are sufficient but never necessary

43 In a two-consumer, two-good exchange economy, a competitive equilibrium allocation is Pareto efficient under standard assumptions. Which alteration most directly invalidates this welfare conclusion without necessarily eliminating equilibrium?

Neoclassical welfare economics: utility maximization and profit maximization Hard
A. One good is produced under constant returns
B. Preferences exhibit local nonsatiation
C. Both consumers have monotonic preferences
D. One consumer's consumption creates pollution for the other

44 A hedonistic welfare framework ranks social states by the sum of individual pleasures and pains. Two states generate utilities and for two individuals. Under utilitarian aggregation, which conclusion follows, assuming interpersonal utility units are cardinally comparable?

Hedonistic foundations of welfare economics Hard
A. The first state is preferred because its maximum utility is higher
B. The two states are socially indifferent because their utility sums coincide
C. The ranking is impossible because utility cannot be represented numerically
D. The second state is preferred because its minimum utility is higher

45 Why does the move from individual utility maximization to a social welfare function require an additional ethical premise?

Hedonistic foundations of welfare economics Hard
A. Market prices always fail to reflect scarcity
B. Individual preferences cannot be represented by ordinal rankings
C. Production functions cannot be differentiated at equilibrium
D. The aggregation rule determines how gains and losses are weighted

46 A policy raises aggregate measured utility but lowers the utility of the least advantaged person. Which inference is justified in a strictly hedonistic-utilitarian framework but not in a prioritarian framework?

Hedonistic foundations of welfare economics Hard
A. The policy is socially better if aggregate utility rises
B. The policy is automatically unjust under every welfare criterion
C. The policy must reduce total economic surplus
D. The policy cannot be evaluated without observing market equilibrium

47 Sraffa's critique of the neoclassical theory of distribution most directly challenges the claim that the rate of return on capital can be determined by a well-defined marginal product of capital because:

Sraffa's critique of neoclassical theory Hard
A. Capital goods are homogeneous and independently measurable
B. Consumer preferences cannot determine relative commodity prices
C. Capital goods are heterogeneous and their valuation depends on distribution
D. Labor supply is perfectly inelastic in all industries

48 In a reswitching example, a technique is cost-minimizing at both a low and a high interest rate but not at an intermediate rate. What implication follows for the neoclassical interpretation of a falling interest rate?

Sraffa's critique of neoclassical theory Hard
A. It proves that wages are independent of the interest rate
B. It can reverse the direction of technique choice more than once
C. It requires production to exhibit increasing returns everywhere
D. It always induces substitution toward more capital-intensive techniques

49 Why does the possibility of capital reversing weaken the claim that a lower real interest rate necessarily signals greater social patience and justifies a more capital-intensive technique?

Sraffa's critique of neoclassical theory Hard
A. Because the same technique may be selected at multiple interest rates
B. Because all production becomes labor-intensive at zero interest
C. Because the wage rate becomes technologically fixed
D. Because savings cannot affect the equilibrium rate of interest

50 In Keynes's short-period framework, firms may reduce employment even when workers are willing to accept lower money wages. Which mechanism best explains this result?

Theoretical setting of Keynes analysis Hard
A. Lower money wages necessarily reduce labor productivity
B. Lower wages can reduce aggregate demand and expected sales
C. Flexible wages automatically increase the liquidity preference
D. A fall in wages eliminates all real-balance effects

51 An economy has unused capacity, sticky prices, and a marginal propensity to consume of . Ignoring taxes, imports, and interest-rate crowding out, an autonomous investment increase of raises equilibrium income by:

Theoretical setting of Keynes analysis Hard
A.
B.
C.
D.

52 Keynes's concept of effective demand differs from Say's Law primarily because effective demand is determined at the point where:

Theoretical setting of Keynes analysis Hard
A. Aggregate expenditure plans validate firms' employment expectations
B. The real wage equals the marginal disutility of labor
C. Desired saving equals the economy's capital stock
D. The money supply equals the demand for transaction balances

53 Keynes's defense of marginal productivity theory of distribution is most consistent with which qualification?

Keynes defense of marginal productivity theory of distribution Hard
A. Wages are determined exclusively by workers' absolute productivity
B. Marginal productivity is irrelevant whenever unemployment exists
C. Distribution may be analyzed conditionally on the employment and output level
D. Marginal productivity directly determines every long-run income share

54 If the marginal product of labor is defined for a given capital stock, why can it fail to determine the economy-wide employment level in Keynesian analysis?

Keynes defense of marginal productivity theory of distribution Hard
A. Because firms never compare wages with marginal products
B. Because the capital stock changes only after consumption falls
C. Because marginal products are always increasing in employment
D. Because employment depends also on expected aggregate demand

55 A sudden collapse in expected profitability causes investment to fall. With a positive spending multiplier and no immediate price adjustment, the most Keynesian sequence is:

Keynes's analysis of capitalist depression Hard
A. Investment falls, income falls, consumption falls, and employment contracts
B. Investment falls, saving falls, investment automatically returns, and output stabilizes
C. Investment falls, interest falls, exports rise, and output expands
D. Investment falls, wages rise, profits rise, and employment expands

56 Why can a generalized attempt by households to increase saving worsen a depression when investment does not respond immediately?

Keynes's analysis of capitalist depression Hard
A. Higher saving necessarily raises the marginal efficiency of capital
B. Lower consumption causes the money multiplier to become infinite
C. The paradox of thrift raises income through higher capital formation
D. Lower consumption reduces income, leaving aggregate realized saving unchanged

57 During a depression, liquidity preference becomes highly interest-elastic while investment remains pessimistic. Which policy implication follows most directly?

Keynes's analysis of capitalist depression Hard
A. Balanced budgets necessarily maximize the employment multiplier
B. Monetary expansion may have weak effects because money is hoarded
C. Fiscal contraction is needed to restore private investment
D. A higher interest rate will reliably increase investment expectations

58 An economy has a spending multiplier of , but a fiscal expansion induces import leakage and raises interest rates, reducing the effective multiplier to . What is the required autonomous spending increase to close an output gap of ?

Efficacy of Keynesian policies Hard
A.
B.
C.
D.

59 Which condition most weakens the effectiveness of deficit-financed fiscal expansion in an economy operating near full capacity?

Efficacy of Keynesian policies Hard
A. A low share of imported consumption goods
B. A high marginal propensity to consume
C. Strong interest-rate crowding out and supply constraints
D. Substantial unemployment and unused productive capacity

60 Suppose the government raises taxes and government purchases by the same amount in a simple Keynesian model with a positive marginal propensity to consume. What is the most accurate result for equilibrium income?

Efficacy of Keynesian policies Hard
A. Income falls by exactly the increase in government purchases
B. Income rises by approximately the increase in government purchases
C. Income remains unchanged because both multipliers are identical
D. Income rises by less than the increase in government purchases