Reading Passage Question
Keynesian economics is a theory that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy). In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.
The theories forming the basis of Keynesian economics were first presented by the British economist John Maynard Keynes in his book, The General Theory of Employment, Interest and Money, published in 1936 during the Great Depression. Keynes contrasted his new approach to the aggregate supply-focused 'classical' economics that preceded his book. The interpretations of Keynes that followed are contentious and several schools of economic thought claim his legacy.
Keynesian economists often argue that private sector decisions lead to inefficient macroeconomic outcomes and as a result active policy responses by the public sector are required. In particular, they call for monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. Keynesian economic theory advocates a mixed economy – predominantly private sector, but with some role for government intervention during recessions.
Keynesian economics served as the standard economic model in the developed nations during the later part of the Great Depression, World War II, and the post-war economic expansion (1945–1973), though it lost some influence following the oil shock and resulting stagflation of the 1970s. The advent of the global financial crisis in 2008 has caused a resurgence in Keynesian thought, and the theory remains as important today as it was nearly 100 years ago.
“Keynesian economics is a theory that in the short run”- is a GMAT reading comprehension passage with answers. Nominees must have a firm understanding of English GMAT reading comprehension. There are 3 comprehension questions in this GMAT Reading Comprehension section. GMAT Reading Comprehension questions are conducted to examine candidates' skills to decipher, interpret, and utilize knowledge or ideas. Candidates can actively prepare by answering GMAT Reading Comprehension Practice Questions.
Solutions and Explanation
1) A Keynesian economist would most likely agree with which of the following statements:
A)Government intervention should be the primary means for fixing the economy in a recession.
B)Private sector decisions lead to an efficient market.
C)The private sector should play the primary role in the economy.
D)Stagflation resulted from private sector behavior.
E)The supply side of the economy is more important than the demand side.
Answer: C
Explanation: The third option is the correct answer. This is because it corresponds to a particular point in the passage. The mixed economy favored by Keynesian economic theory includes a significant portion of the private sector and some government intervention during recessions. The rest of the options are all wrong answers as they are not consistent to be the correct answers after a thorough reading of the passage.
2) Which of the following can be properly inferred from the passage?
A)In the Keynesian view, the aggregate demand represents the productive capacity of the economy.
B)The Keynesian approach is best used during periods of recession.
C)The Keynesian approach was developed as a way to end the Great Depression.
D)Keynesian economists believe that the government should sometimes influence fiscal policy.
E)Keynesian economists believe in focusing on the supply side of the economy.
Answer: D
Explanation: The fourth option is the right answer. This is because it can clearly be inferred with the passage. To stabilize output over the business cycle, they specifically call for the central bank to implement monetary policy and the government to implement fiscal policy. The rest of the options are all invalid as the statements in them are either opposite or distorted.
3) The primary purpose of the passage is to:
A)advocate John Maynard Keyes’ economic theory
B)challenge classical economic theory
C)discuss Keynes’ The General Theory of Employment, Interest and Money
D)present an important historical theory
E)discuss the Keynesian view on monetary policy actions
Answer: D
Explanation: With the fourth option, the passage's main goal is to present a significant historical theory. This is the right answer. John's theory is not being "advocated" or "challenged" by the author, ruling out the first two options. The passage mentions both of the remaining options, but their range is too constrained. Our passage's main purpose is to simply present John's theory.
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