Question 1

Exhibit 16-5
  
-Refer to Exhibit 16-5.If the economy is at point 3,and the natural unemployment rate exists at points 1,4,and 5,it follows that

Accepted Answer

A)  Real GDP is greater than Natural Real GDP. 
B)  Real GDP is less than Natural Real GDP. 
C)  Real GDP is the same as Natural Real GDP. 
D)  the economy is in a recessionary gap. 
E)  b and d 
A)  Real GDP is greater than Natural Real GDP. 
B)  Real GDP is less than Natural Real GDP. 
C)  Real GDP is the same as Natural Real GDP. 
D)  the economy is in a recessionary gap. 
E)  b and d

Question 2

The Friedman natural rate theory states that

Accepted Answer

A)  in both the short run and the long run the economy stays at its natural rate of unemployment. 
B)  the economy will not return to its natural rate of unemployment in either the short run or the long run. 
C)  the economy stays at its natural rate of unemployment in the short run, but not in the long run. 
D)  in the long run the economy returns to its natural rate of unemployment. 
A)  in both the short run and the long run the economy stays at its natural rate of unemployment. 
B)  the economy will not return to its natural rate of unemployment in either the short run or the long run. 
C)  the economy stays at its natural rate of unemployment in the short run, but not in the long run. 
D)  in the long run the economy returns to its natural rate of unemployment.

Question 3

Exhibit 16-7
  
-Refer to Exhibit 16-7. Assume that the starting point is point 1. Suppose that the Fed implements expansionary monetary policy that raises aggregate demand. Which of the following best goes with the diagram shown?

Accepted Answer

A)  New classical theory with policy incorrectly anticipated, bias downward 
B)  New classical theory with policy incorrectly anticipated, bias upward 
C)  Real business cycle theory 
D)  New classical theory with policy unanticipated 
E)  Policy ineffectiveness proposition (PIP) 
A)  New classical theory with policy incorrectly anticipated, bias downward 
B)  New classical theory with policy incorrectly anticipated, bias upward 
C)  Real business cycle theory 
D)  New classical theory with policy unanticipated 
E)  Policy ineffectiveness proposition (PIP)

Question 4

As long as some people anticipate policy,the economic consequences may be the same as if all persons do so.

Accepted Answer

A) True 
 B)False

Question 5

A.W.Phillips collected data on the rate of change in money wages and plotted it against unemployment rates in the United Kingdom.The curve he fit to the data showed that

Accepted Answer

A)  the rate of change of money wage rates and unemployment rates were inversely related. 
B)  the rate of change of money wage rates and unemployment rates were directly related. 
C)  the rate of change of money wage rates and unemployment rates were independent. 
D)  as money wage rates increased, the unemployment rate was cut in more than half. 
A)  the rate of change of money wage rates and unemployment rates were inversely related. 
B)  the rate of change of money wage rates and unemployment rates were directly related. 
C)  the rate of change of money wage rates and unemployment rates were independent. 
D)  as money wage rates increased, the unemployment rate was cut in more than half.

Question 6

The policy ineffectiveness proposition (PIP)argument states that under certain circumstances,neither expansionary demand-side fiscal policy nor expansionary monetary policy is effective at achieving macroeconomic goals.

Accepted Answer

A) True 
 B)False

Question 7

Exhibit 16-2
  
-Refer to Exhibit 16-2.Suppose the economy starts out at point A and the public correctly anticipates that the AD curve will shift from AD1 to AD2.If wages are temporarily fixed,SRAS1 will __________ and the economy will end up at point __________.

Accepted Answer

A)  shift; D 
B)  shift; B 
C)  not shift; D 
D)  not shift; E 
A)  shift; D 
B)  shift; B 
C)  not shift; D 
D)  not shift; E

Question 8

If the public has rational expectations,

Accepted Answer

A)  the only effective policy would be one that is implemented by surprise. 
B)  if the public incorrectly anticipates a given policy, there could be adverse results. 
C)  if policymakers do not do what they say they are going to do, then there could be adverse results. 
D)  a, b, and c 
E)  none of the above 
A)  the only effective policy would be one that is implemented by surprise. 
B)  if the public incorrectly anticipates a given policy, there could be adverse results. 
C)  if policymakers do not do what they say they are going to do, then there could be adverse results. 
D)  a, b, and c 
E)  none of the above

Question 9

Which of the following changes would not be considered a likely source of changes in Real GDP according to real business cycle theory?

Accepted Answer

A)  a natural disaster 
B)  a technological change 
C)  a change in the price of an important input 
D)  a change in the money supply 
E)  none of the above 
A)  a natural disaster 
B)  a technological change 
C)  a change in the price of an important input 
D)  a change in the money supply 
E)  none of the above

Question 10

The original (1958)Phillips curve stated that

Accepted Answer

A)  unemployment and money wage rates move in the same direction. 
B)  unemployment and money wage rates move in opposite directions. 
C)  there is an inverse relationship between price inflation and
Unemployment. 
D)  there is a direct relationship between price inflation and unemployment. 
E)  a and c 
A)  unemployment and money wage rates move in the same direction. 
B)  unemployment and money wage rates move in opposite directions. 
C)  there is an inverse relationship between price inflation and
Unemployment. 
D)  there is a direct relationship between price inflation and unemployment. 
E)  a and c

Question 11

Explain why there is an inverse relationship between wage inflation and unemployment as aggregate demand changes.

Accepted Answer

In an economy with increasing aggregate

Question 12

The terms rational expectations and adaptive expectations are two different names for the same concept.

Accepted Answer

A) True 
 B)False

Question 13

Implied in new Keynesian theory is that when policy is correctly anticipated,there is a tradeoff between inflation and unemployment in

Accepted Answer

A)  neither the short run nor the long run. 
B)  both the short run and the long run. 
C)  the short run, but not in the long run. 
D)  the long run, but not in the short run. 
A)  neither the short run nor the long run. 
B)  both the short run and the long run. 
C)  the short run, but not in the long run. 
D)  the long run, but not in the short run.

Question 14

One of the ideas that found a permanent place in macroeconomics after Milton Friedman's presidential address to the American Economic Association in 1967 was that

Accepted Answer

A)  there is not only a temporary tradeoff between inflation and unemployment, but a permanent tradeoff as well. 
B)  the tradeoff between unemployment and inflation exists only in the long run, but not in the short run. 
C)  people's expectations about economic events affect economic outcomes. 
D)  a and b 
A)  there is not only a temporary tradeoff between inflation and unemployment, but a permanent tradeoff as well. 
B)  the tradeoff between unemployment and inflation exists only in the long run, but not in the short run. 
C)  people's expectations about economic events affect economic outcomes. 
D)  a and b

Question 15

The economy is in long-run equilibrium when government unexpectedly increases aggregate demand.The expected inflation rate is slow to adjust to the higher (actual)inflation rate.If follows that in the short run,according to the Friedman natural rate theory,__________ rises and the __________ falls.

Accepted Answer

A)  the unemployment rate, price level 
B)  Real GDP rises, unemployment rate 
C)  nominal interest rate, real interest rate 
D)  the unemployment rate, Real GDP level 
E)  none of the above 
A)  the unemployment rate, price level 
B)  Real GDP rises, unemployment rate 
C)  nominal interest rate, real interest rate 
D)  the unemployment rate, Real GDP level 
E)  none of the above

Question 16

Describe the policy ineffectiveness proposition (PIP).Be sure to state which economic theory the PIP is associated with and the assumptions that are necessary for this argument to hold.

Accepted Answer

The PIP is associated with the new class

Question 17

Exhibit 16-6
  
-Refer to Exhibit 16-6.The economy is initially in long-run equilibrium at point A.There is a correctly anticipated increase in aggregate demand,prices and wages are flexible,the economy is self-regulating,and people hold rational expectations.The economy will move to point

Accepted Answer

A)  F. 
B)  C. 
C)  B. 
D)  B or C. 
E)  This exhibit does not show the point the economy would move to. 
A)  F. 
B)  C. 
C)  B. 
D)  B or C. 
E)  This exhibit does not show the point the economy would move to.

Question 18

Exhibit 16-4
  
-Refer to Exhibit 16-4.The economy is initially at point A,in long run equilibrium.A real business cycle would be represented by the following sequence of curve shifts:

Accepted Answer

A)  SRAS1 to SRAS2, then LRAS1 to LRAS2. 
B)  AD1 to AD2, then LRAS1 to LRAS2. 
C)  LRAS1 to LRAS2, then AD1 to AD2. 
D)  LRAS1 to LRAS2, then SRAS1 to SRAS2. 
E)  none of the above 
A)  SRAS1 to SRAS2, then LRAS1 to LRAS2. 
B)  AD1 to AD2, then LRAS1 to LRAS2. 
C)  LRAS1 to LRAS2, then AD1 to AD2. 
D)  LRAS1 to LRAS2, then SRAS1 to SRAS2. 
E)  none of the above

Question 19

Rational expectations theory is also known as the Friedman fooling theory.

Accepted Answer

A) True 
 B)False

Question 20

According to new classical theory,if policy is correctly anticipated,expectations are formed rationally,and wages and prices are fully flexible,then an increase in aggregate demand will change Real GDP,but not the price level.

Accepted Answer

A) True 
 B)False

Exam 16: Expectations Theory and the Economy

Exhibit 16-5 -Refer to Exhibit 16-5.If the economy is at point 3,and the natural unemployment rate exists at points 1,4,and 5,it follows that

The Friedman natural rate theory states that

Exhibit 16-7 -Refer to Exhibit 16-7. Assume that the starting point is point 1. Suppose that the Fed implements expansionary monetary policy that raises aggregate demand. Which of the following best goes with the diagram shown?

As long as some people anticipate policy,the economic consequences may be the same as if all persons do so.

A.W.Phillips collected data on the rate of change in money wages and plotted it against unemployment rates in the United Kingdom.The curve he fit to the data showed that

The policy ineffectiveness proposition (PIP)argument states that under certain circumstances,neither expansionary demand-side fiscal policy nor expansionary monetary policy is effective at achieving macroeconomic goals.

Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts out at point A and the public correctly anticipates that the AD curve will shift from AD1 to AD2.If wages are temporarily fixed,SRAS1 will __________ and the economy will end up at point __________.

If the public has rational expectations,

Which of the following changes would not be considered a likely source of changes in Real GDP according to real business cycle theory?

The original (1958)Phillips curve stated that

Explain why there is an inverse relationship between wage inflation and unemployment as aggregate demand changes.

The terms rational expectations and adaptive expectations are two different names for the same concept.

Implied in new Keynesian theory is that when policy is correctly anticipated,there is a tradeoff between inflation and unemployment in

One of the ideas that found a permanent place in macroeconomics after Milton Friedman's presidential address to the American Economic Association in 1967 was that

The economy is in long-run equilibrium when government unexpectedly increases aggregate demand.The expected inflation rate is slow to adjust to the higher (actual)inflation rate.If follows that in the short run,according to the Friedman natural rate theory,__________ rises and the __________ falls.

Describe the policy ineffectiveness proposition (PIP).Be sure to state which economic theory the PIP is associated with and the assumptions that are necessary for this argument to hold.

Exhibit 16-6 -Refer to Exhibit 16-6.The economy is initially in long-run equilibrium at point A.There is a correctly anticipated increase in aggregate demand,prices and wages are flexible,the economy is self-regulating,and people hold rational expectations.The economy will move to point

Exhibit 16-4 -Refer to Exhibit 16-4.The economy is initially at point A,in long run equilibrium.A real business cycle would be represented by the following sequence of curve shifts:

Rational expectations theory is also known as the Friedman fooling theory.

According to new classical theory,if policy is correctly anticipated,expectations are formed rationally,and wages and prices are fully flexible,then an increase in aggregate demand will change Real GDP,but not the price level.

What Economics Is About

Production Possibilities Frontier Framework

Supply and Demand: Theory

Prices: Free, Controlled, and Relative

Supply, Demand, and Price: Applications

Macroeconomic Measurements: Prices and Unemployment

Macroeconomic Measurements: GDP and Real GDP

Aggregate Demand and Aggregate Supply

Classical Macroeconomics and the Self Regulating Economy

Keynesian Macroeconomics and Economic Instability: A Critique of the Self-Regulating Economy

Fiscal Policy and the Federal Budget

Money, Banking,and the Financial System

The Federal Reserve System

Money and the Economy

Monetary Policy

Economic Growth: Resources, Technology, Ideas, and Institutions

The Financial Crisis of 2007-2009

Debates in Macroeconomics Over the Role and Effects of Government

Elasticity

Consumer Choice: Maximizing Utility and Behavioral Economics

Production and Costs

Perfect Competition

Monopoly

Monopolistic Competition, Oligopoly, and Game Theory

Government and Product Markets: Antitrust and Regulation

Factor Markets: With Emphasis on the Labor Market

Wages,Unions,and Labor

The Distribution of Income and Poverty

Interest, Rent, and Profit

Market Failure: Externalities, Public Goods, and Asymmetric Information

Public Choice and Special-Interest-Group Politics

Building Theories to Explain Everyday Life: From Observations to Questions to Theories to Predictions

International Trade

International Finance

Globalization and International Impacts on the Economy

The Economic Case For and Against Government: Five Topics Considered

Stocks, Bonds, Futures, and Options

Agriculture: Problems, Policies, and Unintended Effects

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Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts out at point A and the public correctly anticipates that the AD curve will shift from AD₁ to AD₂.If wages are temporarily fixed,SRAS₁ will and the economy will end up at point .

The economy is in long-run equilibrium when government unexpectedly increases aggregate demand.The expected inflation rate is slow to adjust to the higher (actual)inflation rate.If follows that in the short run,according to the Friedman natural rate theory, rises and the falls.