Question 1

An unannounced increase in the money supply will increase both prices and real GDP under

Accepted Answer

A)  neither rational nor adaptive expectations. 
B)  rational but not adaptive expectations. 
C)  adaptive but not rational expectations. 
D)  both adaptive and rational expectations. 
A)  neither rational nor adaptive expectations. 
B)  rational but not adaptive expectations. 
C)  adaptive but not rational expectations. 
D)  both adaptive and rational expectations. D

Question 2

In a world of rational expectations,

Accepted Answer

A)  an unanticipated increase in money supply leads immediately to lower nominal interest rates. 
B)  an unanticipated increase in money supply leads immediately to higher nominal interest rates. 
C)  an anticipated increase in money supply leads immediately to lower nominal interest rates. 
D)  an anticipated decrease in money supply leads immediately to higher nominal interest rates. 
A)  an unanticipated increase in money supply leads immediately to lower nominal interest rates. 
B)  an unanticipated increase in money supply leads immediately to higher nominal interest rates. 
C)  an anticipated increase in money supply leads immediately to lower nominal interest rates. 
D)  an anticipated decrease in money supply leads immediately to higher nominal interest rates. A

Question 3

Real wages will rise if

Accepted Answer

A)  money supply growth is less than expectations. 
B)  real interest rates fall. 
C)  aggregate demand is less than aggregate supply. 
D)  money supply growth exceeds the inflation rate. 
A)  money supply growth is less than expectations. 
B)  real interest rates fall. 
C)  aggregate demand is less than aggregate supply. 
D)  money supply growth exceeds the inflation rate. A

Question 4

If wages and prices are flexible, an anticipated change in the money supply has no effect on

Accepted Answer

A)  money demand. 
B)  nominal interest rates. 
C)  real GDP. 
D)  the inflation rate. 
A)  money demand. 
B)  nominal interest rates. 
C)  real GDP. 
D)  the inflation rate.

Question 5

If wages do not instantaneously adjust to reflect expected inflation that is based on an anticipated increase in the money supply,

Accepted Answer

A)  the aggregate demand and positively sloped aggregate supply curve shift to the right at the same time. 
B)  the positively sloping aggregate supply curve shifts to the left after the aggregate demand curve shifts to the right. 
C)  the positively sloping aggregate supply curve shifts to the left before the aggregate demand curve shifts to the right. 
D)  the positively sloping aggregate supply curve does not shift to the right at the same time as the aggregate demand curve shifts to the left. 
A)  the aggregate demand and positively sloped aggregate supply curve shift to the right at the same time. 
B)  the positively sloping aggregate supply curve shifts to the left after the aggregate demand curve shifts to the right. 
C)  the positively sloping aggregate supply curve shifts to the left before the aggregate demand curve shifts to the right. 
D)  the positively sloping aggregate supply curve does not shift to the right at the same time as the aggregate demand curve shifts to the left.

Question 6

Adaptive inflationary expectations are based on

Accepted Answer

A)  monetary growth. 
B)  all available information. 
C)  previous inflation rates. 
D)  price changes in futures markets. 
A)  monetary growth. 
B)  all available information. 
C)  previous inflation rates. 
D)  price changes in futures markets.

Question 7

If wages instantaneously adjust to reflect expected inflation that is based on an anticipated increase in the money supply,

Accepted Answer

A)  the aggregate demand and positively sloped aggregate supply curve shift to the right at the same time. 
B)  the positively sloping aggregate supply curve shifts to the left after the aggregate demand curve shifts to the right. 
C)  the positively sloping aggregate supply curve shifts to the left before the aggregate demand curve shifts to the right. 
D)  the positively sloping aggregate supply curve does not shift to the right at the same time as the aggregate demand curve shifts to the left. 
A)  the aggregate demand and positively sloped aggregate supply curve shift to the right at the same time. 
B)  the positively sloping aggregate supply curve shifts to the left after the aggregate demand curve shifts to the right. 
C)  the positively sloping aggregate supply curve shifts to the left before the aggregate demand curve shifts to the right. 
D)  the positively sloping aggregate supply curve does not shift to the right at the same time as the aggregate demand curve shifts to the left.

Question 8

If the consensus in securities markets is that a previous increase in the money supply will be inflationary, the likely result will be

Accepted Answer

A)  higher real interest rates. 
B)  higher nominal interest rates. 
C)  lower real interest rates. 
D)  lower nominal interest rates. 
A)  higher real interest rates. 
B)  higher nominal interest rates. 
C)  lower real interest rates. 
D)  lower nominal interest rates.

Question 9

Contractual inflexibility is most likely to slow price adjustment in the

Accepted Answer

A)  money market. 
B)  capital market. 
C)  real estate market. 
D)  labor market. 
A)  money market. 
B)  capital market. 
C)  real estate market. 
D)  labor market.

Question 10

Which of the following would be included in inflationary expectations that are formed adaptively?

Accepted Answer

A)  Money supply growth over the past two years 
B)  Statements made by the President of the United States 
C)  The average inflation rate over the past three years 
D)  A recent price agreement by oil exporting nations 
A)  Money supply growth over the past two years 
B)  Statements made by the President of the United States 
C)  The average inflation rate over the past three years 
D)  A recent price agreement by oil exporting nations

Question 11

If wages and prices are flexible and expectations are formed rationally, an increase in the money supply will cause

Accepted Answer

A)  real wages to rise. 
B)  real wages to fall. 
C)  nominal wages to rise. 
D)  nominal wages to fall. 
A)  real wages to rise. 
B)  real wages to fall. 
C)  nominal wages to rise. 
D)  nominal wages to fall.

Question 12

Suppose that for several periods the aggregate demand and supply curves have been intersecting at the same point, and at full employment. Then the central bank increases money growth as a result of an announced policy change. Under the assumption of adaptive expectations the likely short-run result is __________ output and __________ price level.

Accepted Answer

A)  rising; a rising 
B)  rising; an unchanged 
C)  unchanged; a rising 
D)  unchanged; an unchanged 
A)  rising; a rising 
B)  rising; an unchanged 
C)  unchanged; a rising 
D)  unchanged; an unchanged

Question 13

An effective way to restore credibility to monetary authorities after a period of hyperinflation is

Accepted Answer

A)  the introduction of a new monetary unit. 
B)  the introduction of wage and price controls. 
C)  a reduction in bank reserve requirements. 
D)  the centralization of monetary and fiscal policy under a single governmental unit. 
A)  the introduction of a new monetary unit. 
B)  the introduction of wage and price controls. 
C)  a reduction in bank reserve requirements. 
D)  the centralization of monetary and fiscal policy under a single governmental unit.

Question 14

Suppose that for several periods the aggregate demand and supply curves have been intersecting at the same point, and at full employment. Then the central bank increases money growth as the result of an unannounced policy change. Under New Classical assumptions the likely short-run result is __________ output and __________ price level.

Accepted Answer

A)  rising; a rising 
B)  rising; an unchanged 
C)  unchanged; a rising 
D)  unchanged; an unchanged 
A)  rising; a rising 
B)  rising; an unchanged 
C)  unchanged; a rising 
D)  unchanged; an unchanged

Question 15

If interest rates have been increasing, adaptive expectations would predict

Accepted Answer

A)  that interest rates will increase. 
B)  that interest rates will decrease. 
C)  that inflation rates will increase. 
D)  that inflation rates will decrease. 
A)  that interest rates will increase. 
B)  that interest rates will decrease. 
C)  that inflation rates will increase. 
D)  that inflation rates will decrease.

Question 16

Real wages will decline if

Accepted Answer

A)  money supply growth exceeds expectations. 
B)  real interest rates rise. 
C)  aggregate demand exceeds aggregate supply. 
D)  money supply growth exceeds the inflation rate. 
A)  money supply growth exceeds expectations. 
B)  real interest rates rise. 
C)  aggregate demand exceeds aggregate supply. 
D)  money supply growth exceeds the inflation rate.

Question 17

If expectations are formed rationally and wages are flexible, the aggregate supply curve is

Accepted Answer

A)  upward sloping. 
B)  horizontal. 
C)  vertical. 
D)  relatively flat. 
A)  upward sloping. 
B)  horizontal. 
C)  vertical. 
D)  relatively flat.

Question 18

Suppose that for several periods the aggregate demand and supply curves have been intersecting at the same point, and at full employment. The central bank increases money growth as a result of an unannounced policy change. Under the assumption of adaptive expectations the likely short-run result is __________ output and __________ price level.

Accepted Answer

A)  rising; a rising 
B)  rising; an unchanged 
C)  unchanged; a rising 
D)  unchanged; an unchanged 
A)  rising; a rising 
B)  rising; an unchanged 
C)  unchanged; a rising 
D)  unchanged; an unchanged

Question 19

Suppose that for several periods the aggregate demand and supply curves have been intersecting at the same point, and at full employment. Then the central bank increases money growth as the result of an announced policy change. Under New Classical assumptions the likely short-run result is __________ output and __________ price level.

Accepted Answer

A)  rising; a rising 
B)  rising; an unchanged 
C)  unchanged; a rising 
D)  unchanged; an unchanged 
A)  rising; a rising 
B)  rising; an unchanged 
C)  unchanged; a rising 
D)  unchanged; an unchanged

Question 20

Assuming rational expectations and complete wage and price flexibility, systematic stabilization policy impacts

Accepted Answer

A)  real GDP. 
B)  real wages. 
C)  the unemployment rate. 
D)  the inflation rate. 
A)  real GDP. 
B)  real wages. 
C)  the unemployment rate. 
D)  the inflation rate.

Exam 27: Rational Expectations: Theory and Policy Implications

An unannounced increase in the money supply will increase both prices and real GDP under

In a world of rational expectations,

Real wages will rise if

If wages and prices are flexible, an anticipated change in the money supply has no effect on

If wages do not instantaneously adjust to reflect expected inflation that is based on an anticipated increase in the money supply,

Adaptive inflationary expectations are based on

If wages instantaneously adjust to reflect expected inflation that is based on an anticipated increase in the money supply,

If the consensus in securities markets is that a previous increase in the money supply will be inflationary, the likely result will be

Contractual inflexibility is most likely to slow price adjustment in the

Which of the following would be included in inflationary expectations that are formed adaptively?

If wages and prices are flexible and expectations are formed rationally, an increase in the money supply will cause

An effective way to restore credibility to monetary authorities after a period of hyperinflation is

If interest rates have been increasing, adaptive expectations would predict

Real wages will decline if

If expectations are formed rationally and wages are flexible, the aggregate supply curve is

Assuming rational expectations and complete wage and price flexibility, systematic stabilization policy impacts

Introducing Money, Banking, and Financial Markets

The Role of Money in the Macroeconomy

Financial Instruments, Markets, and Institutions

Interest Rate Measurement and Behavior

The Term and Risk Structure of Interest Rates

The Structure and Performance of Securities Markets

The Pricing of Risky Financial Assets

Money and Capital Markets

Demystifying Derivatives

Understanding Foreign Exchange

The Nature of Financial Intermediation

Depository Financial Institutions

Nondepository Financial Institutions

Understanding Financial Contracts

The Regulation of Markets and Institutions

Financial System Design

Who's in Charge Here?

Bank Reserves and the Money Supply

The Instruments of Central Bankin

Understanding Movements in Bank Reserves

Monetary Policy Strategy

The Classical Foundations

The Keynesian Framework

The ISLM World

Money and Economic Stability in the ISLM World

An Aggregate Supply and Demand Perspective on Money and Economic Stability

Empirical Evidence on the Effectiveness of Monetary Policy

Tying It All Together

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