Question 1

If inflationary expectations are based on all available information, they are referred to as

Accepted Answer

A)  optimal. 
B)  rational. 
C)  adaptive. 
D)  informed. 
A)  optimal. 
B)  rational. 
C)  adaptive. 
D)  informed.

Question 2

If labor contracts prevent wage flexibility, the aggregate supply curve will be

Accepted Answer

A)  vertical. 
B)  horizontal. 
C)  negatively sloped. 
D)  positively sloped. 
A)  vertical. 
B)  horizontal. 
C)  negatively sloped. 
D)  positively sloped.

Question 3

Extrapolating past values of a variable to the present is the practice of __________ expectations, which is fairly common among __________ economists.

Accepted Answer

A)  adaptive; New Classical 
B)  adaptive; Keynesian 
C)  rational; New Classical 
D)  rational; Keynesian 
A)  adaptive; New Classical 
B)  adaptive; Keynesian 
C)  rational; New Classical 
D)  rational; Keynesian

Question 4

In a world of rational expectations,

Accepted Answer

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

Question 5

If an inflation forecast is based on last year's inflation rate, it is said to be

Accepted Answer

A)  historical. 
B)  rational. 
C)  logical. 
D)  adaptive. 
A)  historical. 
B)  rational. 
C)  logical. 
D)  adaptive.

Question 6

Can a Keynesian still believe in an active counter-cyclical policy if she adopts the assumption of rational expectations?

Accepted Answer

A)  No, it destroys the case for active policy. 
B)  Yes, so long as she continues to assume wage and price rigidity. 
C)  Yes, if she also adopts the assumption of wage and price flexibility. 
D)  Yes, if she assumes that economic policy shifts are anticipated in advance. 
A)  No, it destroys the case for active policy. 
B)  Yes, so long as she continues to assume wage and price rigidity. 
C)  Yes, if she also adopts the assumption of wage and price flexibility. 
D)  Yes, if she assumes that economic policy shifts are anticipated in advance.

Question 7

A rightward shift of aggregate demand will raise output only if

Accepted Answer

A)  wages remain unchanged. 
B)  wages rise by a lower percentage than prices. 
C)  wages rise by the same percentage as prices. 
D)  wages rise by a greater percentage than prices. 
A)  wages remain unchanged. 
B)  wages rise by a lower percentage than prices. 
C)  wages rise by the same percentage as prices. 
D)  wages rise by a greater percentage than prices.

Question 8

If an inflation forecast is based on expected monetary growth, it is likely to be

Accepted Answer

A)  historical. 
B)  rational. 
C)  logical. 
D)  adaptive. 
A)  historical. 
B)  rational. 
C)  logical. 
D)  adaptive.

Question 9

If wages and prices are flexible, then an anticipated change in the money supply will cause wages and prices to __________ the actual inflation rate.

Accepted Answer

A)  increase at the same rate as 
B)  increase at a higher rate than 
C)  increase at a slower rate than 
D)  cannot be exactly predicted 
A)  increase at the same rate as 
B)  increase at a higher rate than 
C)  increase at a slower rate than 
D)  cannot be exactly predicted

Question 10

An anticipated change in the money supply will result in a(n)__________ level of economic activity and a __________ price level.

Accepted Answer

A)  increased; higher 
B)  decreased; higher 
C)  unchanged; lower 
D)  unchanged; higher 
A)  increased; higher 
B)  decreased; higher 
C)  unchanged; lower 
D)  unchanged; higher

Question 11

As long as wages and prices are flexible, an anticipated change in the money supply will lead to an increase in

Accepted Answer

A)  the unemployment rate. 
B)  industrial production. 
C)  nominal income. 
D)  real wages. 
A)  the unemployment rate. 
B)  industrial production. 
C)  nominal income. 
D)  real wages.

Question 12

A contractionary monetary policy can reduce real GDP if expectations are formed rationally and monetary policy is

Accepted Answer

A)  combined with expansionary fiscal policy. 
B)  carried out in total secrecy. 
C)  publicly announced and credible. 
D)  combined with contractionary fiscal policy. 
A)  combined with expansionary fiscal policy. 
B)  carried out in total secrecy. 
C)  publicly announced and credible. 
D)  combined with contractionary fiscal policy.

Question 13

The primary incentive for economic agents to formulate expectations rationally is to

Accepted Answer

A)  increase earnings. 
B)  increase prices. 
C)  reduce prices. 
D)  ensure that all expectations are realized. 
A)  increase earnings. 
B)  increase prices. 
C)  reduce prices. 
D)  ensure that all expectations are realized.

Question 14

Adaptive expectations are "__________" according to the New Classical economists because they __________ information it is possible to use in making a forecast.

Accepted Answer

A)  rational; include all 
B)  rational; exclude some 
C)  irrational; include all 
D)  irrational; exclude some 
A)  rational; include all 
B)  rational; exclude some 
C)  irrational; include all 
D)  irrational; exclude some

Question 15

A contractionary monetary policy can reduce the inflation rate without causing a rise in unemployment if expectations are formed rationally and monetary policy is

Accepted Answer

A)  combined with expansionary fiscal policy. 
B)  carried out in total secrecy. 
C)  publicly announced and credible. 
D)  combined with contractionary fiscal policy. 
A)  combined with expansionary fiscal policy. 
B)  carried out in total secrecy. 
C)  publicly announced and credible. 
D)  combined with contractionary fiscal policy.

Question 16

According to rational expectations,

Accepted Answer

A)  the Fed should focus its policies on interest rates. 
B)  the Fed should focus its policies on inflation. 
C)  the Fed should focus its policies on unemployment. 
D)  the Fed is unable to influence real economic activity. 
A)  the Fed should focus its policies on interest rates. 
B)  the Fed should focus its policies on inflation. 
C)  the Fed should focus its policies on unemployment. 
D)  the Fed is unable to influence real economic activity.

Question 17

If participants in securities markets believe that an announced decrease in the money supply will reduce the rate of inflation, 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 18

The assumption that wages adjust more slowly than prices implies that the Phillips Curve

Accepted Answer

A)  exists in the short-run. 
B)  exists in the long-run. 
C)  is vertical. 
D)  does not exist. 
A)  exists in the short-run. 
B)  exists in the long-run. 
C)  is vertical. 
D)  does not exist.

Question 19

Keynesians argue that changes in wages will lag price level changes even if expectations are formed rationally because

Accepted Answer

A)  workers have very little bargaining power compared with that of management. 
B)  only a small percentage of workers are unionized. 
C)  wages are often set by long-term contracts. 
D)  workers often have incorrect information. 
A)  workers have very little bargaining power compared with that of management. 
B)  only a small percentage of workers are unionized. 
C)  wages are often set by long-term contracts. 
D)  workers often have incorrect information.

Question 20

If expectations are formed rationally and wages are inflexible in the short run, the short-run 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.

Exam 27: Rational Expectations: Theory and Policy Implications

If inflationary expectations are based on all available information, they are referred to as

If labor contracts prevent wage flexibility, the aggregate supply curve will be

Extrapolating past values of a variable to the present is the practice of __________ expectations, which is fairly common among __________ economists.

In a world of rational expectations,

If an inflation forecast is based on last year's inflation rate, it is said to be

Can a Keynesian still believe in an active counter-cyclical policy if she adopts the assumption of rational expectations?

A rightward shift of aggregate demand will raise output only if

If an inflation forecast is based on expected monetary growth, it is likely to be

If wages and prices are flexible, then an anticipated change in the money supply will cause wages and prices to __________ the actual inflation rate.

An anticipated change in the money supply will result in a(n)__________ level of economic activity and a __________ price level.

As long as wages and prices are flexible, an anticipated change in the money supply will lead to an increase in

A contractionary monetary policy can reduce real GDP if expectations are formed rationally and monetary policy is

The primary incentive for economic agents to formulate expectations rationally is to

Adaptive expectations are "__________" according to the New Classical economists because they __________ information it is possible to use in making a forecast.

A contractionary monetary policy can reduce the inflation rate without causing a rise in unemployment if expectations are formed rationally and monetary policy is

According to rational expectations,

If participants in securities markets believe that an announced decrease in the money supply will reduce the rate of inflation, the likely result will be

The assumption that wages adjust more slowly than prices implies that the Phillips Curve

Keynesians argue that changes in wages will lag price level changes even if expectations are formed rationally because

If expectations are formed rationally and wages are inflexible in the short run, the short-run aggregate supply curve is

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

Filters

Extrapolating past values of a variable to the present is the practice of expectations, which is fairly common among economists.

An anticipated change in the money supply will result in a(n) level of economic activity and a price level.

Adaptive expectations are "" according to the New Classical economists because they information it is possible to use in making a forecast.