Exam 16: Expectations Theory and the Economy

Suppose that in a new classical model the public anticipates that policymakers will increase aggregate demand.However,aggregate demand increases by less than what the public anticipated.The result in the short run is that Real GDP ____________ and the price level ____________.

If there is a stable downward-sloping Phillips curve,it follows that an economy can choose the combination of

The main difference between new classical and new Keynesian theory is with respect to the assumption of

As the price level falls,real wage ____________and people choose to work ___________.

New Keynesian theorists argue that

If expectations are formed rationally,wages and prices are not completely flexible in the short run,and policy is correctly anticipated,increases in aggregate demand will stimulate the economy to higher levels of Real GDP and lower levels of unemployment in

Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts out at point A.Next,the public anticipates that the Fed will use expansionary monetary policy to shift the AD curve from AD₁ to AD₂.What happens,instead,is that the Fed does not raise aggregate demand as much as the public expects (bias upward). Instead the Fed pushes the AD curve from AD₁ to AD₃.As a result,according to new classical theory in the short run the economy moves to point

Exhibit 16-6 -Refer to Exhibit 16-6.The economy is initially at point B.There is an unanticipated increase in aggregate demand,prices and wages are flexible,the economy is self-regulating,and people hold adaptive expectations.In the short run the economy will move to point __________ and in the long run the economy will be at point __________.

The economist who,in his presidential address to the American Economic Association in 1967,attacked the idea of a permanent downward-sloping Phillips curve was

The economy is initially in long-run equilibrium.Expectations are adaptive,prices and wages are flexible,and there is an unanticipated increase in aggregate demand.In the short run,the price level will be __________ than it was in long-run equilibrium and Real GDP will be __________ than it was in long-run equilibrium.

In real business cycle theory,business cycle expansions begin as a result of changes in

Which theory of the business cycle emphasizes initiating changes in aggregate supply?

If expectations are formed rationally,wages and prices are completely flexible in the short run and policy is correctly anticipated,increases in aggregate demand will

Stagflation implies that

The real business cycle theory holds that the business cycle

As incorrectly low inflation expectations catch up with the higher actual inflation rate,the SRAS curve shifts __________ and the short-run Phillips curve shifts __________.

Exhibit 16-1 -Refer to Exhibit 16-1.Suppose the economy is currently at point A on the short-run Phillips curve,SRPC?.What could get the economy to move to point B?

Stagflation

The Samuelson-Solow version of the Phillips curve states that

The original (1958)Phillips curve differed from the Samuelson-Solow Phillips curve in that