AA Economics Theories 2

Question 1

According to Keynesian economics, what is the primary cause of recessions?

Accepted Answer

Insufficient aggregate demand

Answer

Keynes argued that recessions result from a shortfall in total spending (aggregate demand) in the economy.

Question 2

The Laffer Curve illustrates the relationship between tax rates and:

Accepted Answer

Tax revenue collected

Answer

The Laffer Curve shows that both very low and very high tax rates generate less revenue, with a peak somewhere in between.

Question 3

Which theory argues that wages are 'sticky downward,' making unemployment worse during downturns?

Accepted Answer

Keynesian economics

Answer

Keynesian theory holds that nominal wages resist falling, so firms cut jobs instead of wages during recessions.

Question 4

In public choice theory, the term 'rent-seeking' refers to:

Accepted Answer

Firms lobbying government for favorable regulations

Answer

Rent-seeking describes using political influence to gain economic advantages rather than creating new wealth.

Question 5

The permanent income hypothesis, developed by Milton Friedman, predicts that consumers base spending on:

Accepted Answer

Expected long-run average income

Answer

Friedman argued people smooth consumption over time based on expected lifetime income, not just today's income.

AA - Associate of Arts Practice Test