Exam 16: Expectations Theory and the Economy

A rise in the expected price level leads to an expectation that real wages will ____________,which will cause people to work __________,shifting the SRAS curve _______________.

Exhibit 16-1 -Refer to Exhibit 16-1.According to new classical macroeconomists,if decreases in aggregate demand are unanticipated,then the economy will move from point C to

According to real business cycle theorists,changes in Real GDP are the result of initial changes in

Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts at point B.Fed monetary policy shifts the AD curve to AD₁.A recession is likely if the economy operates under __________ assumptions,which include wage and price __________.

According to new classical theory,if the public correctly anticipates a government policy to increase aggregate demand,then the

Two key assumptions of new Keynesian theory include:

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 long run point _____________ best represents the new state of the economy.

The Friedman natural rate theory is built upon

A person's real wage will fall if the nominal wage falls,the price level rises,or both.

The original (1958)Phillips curve

The Friedman natural rate theory is based on rational expectations and is also called the new classical theory.

Milton Friedman argued that there

Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts at point A.The AD curve shifts from AD₁ to AD₂and the public perfectly anticipates this.Under new Keynesian macroeconomic assumptions,the most likely short-run equilibrium point will be

According to real business cycle theorists,if the long-run aggregate supply (LRAS)curve shifts to the left,Real GDP __________,the price level __________,the demand for labor __________,money wages __________,real wages __________,and workers choose to work __________.

Exhibit 16-11 -Refer to Exhibit 16-11. Assume that the starting point is point 1. Suppose that there is a supply-side change capable of reducing the capacity of the economy to produce. Which of the following best goes with the diagram shown?

New classical economists believe that it is possible under certain circumstances for an increase in the money supply to lead to a decrease in Real GDP in the short run.

The simultaneous occurrence of high inflation and high unemployment is called

According to new classical economists,when monetary and fiscal policies are __________ anticipated,people form their expectations __________,and wages and prices are __________,the policy ineffectiveness proposition (PIP)results.

Suppose that the Fed expects to increase the money supply by $49 billion,but economic agents expect that the increase will be closer to $75 billion. Using rational expectations theory,the result will be ______________ Real GDP and a ________________ price level.

The difference between the new classical theory and the new Keynesian theory is the assumption of