The Difference Between the Classical Approach and the Keynesian Approach

question 41

Multiple Choice

The difference between the classical approach and the Keynesian approach to fiscal policy is

• A)Keynesians believe that natural forces in the economy would tend toward full employment
• B)Keynesians believe that natural forces in the economy would not tend toward full employment,but they were distrustful of government's ability to stimulate the economy
• C)classical economists believe that the economy would not achieve its potential GDP but that any action of the government would make matters worse
• D)Keynesians believe that it may be necessary that government increase aggregate demand so as to stimulate output and employment,if the economy is to achieve its potential output
• E)both the classical economists and Keynesians were equally distrustful of government intervention in the economy

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Definitions:

Longer Maturities

Refers to bonds or other fixed-income securities that have a longer time until the final repayment date.

Pure Yield Pickup Swap

A strategy where an investor swaps out of one bond into another with the aim of achieving a higher yield.

Price Risk

The possibility that the value of a financial instrument or asset will fluctuate due to changes in market prices, affecting investors' returns.

Reinvestment Rate Risk

The risk that income from an investment will be reinvested at a lower rate than the original investment.