Question 1

The original Phillips curve depicted an inverse relationship between wage inflation and unemployment.

Accepted Answer

A) True 
 B)False

Question 2

According to Friedman,in which of the following situations is the economy in long-run equilibrium?

Accepted Answer

A)  The average inflation rate over the past five years is 2 percent and the expected inflation rate is 2 percent. 
B)  The expected economic growth rate is 3 percent and the actual inflation rate is 3 percent. 
C)  The expected economic growth rate is 2 percent and the expected inflation rate is 2 percent. 
D)  The expected inflation rate is 3 percent and the actual inflation rate is 3 percent. 
A)  The average inflation rate over the past five years is 2 percent and the expected inflation rate is 2 percent. 
B)  The expected economic growth rate is 3 percent and the actual inflation rate is 3 percent. 
C)  The expected economic growth rate is 2 percent and the expected inflation rate is 2 percent. 
D)  The expected inflation rate is 3 percent and the actual inflation rate is 3 percent.

Question 3

Real business cycle theory would emphasize the ability of a beneficial supply shock to shift the __________ curve rightward and __________ Real GDP.

Accepted Answer

A)  AD; lower 
B)  AD; raise 
C)  LRAS; lower 
D)  LRAS; raise 
A)  AD; lower 
B)  AD; raise 
C)  LRAS; lower 
D)  LRAS; raise

Question 4

According to rational expectations theory,

Accepted Answer

A)  every day is a new day and yesterday's occurrences have no bearing on today's decisions. 
B)  when making decisions a person will consider only information based on past experience. 
C)  even though a person considers information related to future events as potentially important for decision making, he realizes that such information is unreliable and worthless. 
D)  past experience is a good guide for decision making, but so is information related to possible future outcomes. 
A)  every day is a new day and yesterday's occurrences have no bearing on today's decisions. 
B)  when making decisions a person will consider only information based on past experience. 
C)  even though a person considers information related to future events as potentially important for decision making, he realizes that such information is unreliable and worthless. 
D)  past experience is a good guide for decision making, but so is information related to possible future outcomes.

Question 5

According to Milton Friedman,the reason there are two Phillips curves is because

Accepted Answer

A)  the expected inflation rate is always higher than the actual inflation rate. 
B)  wages are inflexible. 
C)  prices are inflexible. 
D)  the expected inflation rate does not instantaneously adjust to changes in the actual inflation rate. 
E)  the expected inflation rate is equal to 1 minus the actual inflation rate. 
A)  the expected inflation rate is always higher than the actual inflation rate. 
B)  wages are inflexible. 
C)  prices are inflexible. 
D)  the expected inflation rate does not instantaneously adjust to changes in the actual inflation rate. 
E)  the expected inflation rate is equal to 1 minus the actual inflation rate.

Question 6

The Samuelson and Solow Phillips curve suggested a(n)__________ relationship between the rate of change in __________ and the unemployment rate.

Accepted Answer

A)  direct; real wage rates 
B)  inverse; money wage rates 
C)  inverse; prices 
D)  direct; prices 
E)  none of the above 
A)  direct; real wage rates 
B)  inverse; money wage rates 
C)  inverse; prices 
D)  direct; prices 
E)  none of the above

Question 7

Exhibit 16-1
  
-Refer to Exhibit 16-1.Suppose the economy is currently at point B on the short-run Phillips curve,SRPC1.What could get the economy to move to point C on SRPC2?

Accepted Answer

A)  The realization on the part of workers that their currently held expected inflation rate is too high; they revise it upward, thus shifting the short-run aggregate supply curve rightward. 
B)  The realization on the part of workers that their currently held expected inflation rate is too high; they revise it downward, thus shifting the short-run aggregate supply curve rightward. 
C)  The realization on the part of workers that their currently held expected inflation rate is too low; they revise it upward, thus shifting the short-run aggregate supply curve leftward. 
D)  The realization on the part of workers that their currently held expected inflation rate is too low; they revise it downward, thus shifting the short-run aggregate supply curve rightward. 
A)  The realization on the part of workers that their currently held expected inflation rate is too high; they revise it upward, thus shifting the short-run aggregate supply curve rightward. 
B)  The realization on the part of workers that their currently held expected inflation rate is too high; they revise it downward, thus shifting the short-run aggregate supply curve rightward. 
C)  The realization on the part of workers that their currently held expected inflation rate is too low; they revise it upward, thus shifting the short-run aggregate supply curve leftward. 
D)  The realization on the part of workers that their currently held expected inflation rate is too low; they revise it downward, thus shifting the short-run aggregate supply curve rightward.

Question 8

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

Accepted Answer

A)  rises; more 
B)  rises; less 
C)  falls; more 
D)  falls; less 
A)  rises; more 
B)  rises; less 
C)  falls; more 
D)  falls; less

Question 9

The concept of rational expectations first appeared on the economic scene in _______,but it wasn't until the _____________ that it received more significant notice in the economics profession.

Accepted Answer

A)  1931; early 1970s 
B)  1961; early 1970s 
C)  1981; early 1990s 
D)  1991; early 2000s 
E)  1921; early 1980s 
A)  1931; early 1970s 
B)  1961; early 1970s 
C)  1981; early 1990s 
D)  1991; early 2000s 
E)  1921; early 1980s

Question 10

Milton Friedman argued that there is a

Accepted Answer

A)  permanent downward-sloping Phillips curve. 
B)  temporary downward-sloping Phillips curve. 
C)  temporary upward-sloping Phillips curve. 
D)  permanent upward-sloping Phillips curve. 
A)  permanent downward-sloping Phillips curve. 
B)  temporary downward-sloping Phillips curve. 
C)  temporary upward-sloping Phillips curve. 
D)  permanent upward-sloping Phillips curve.

Question 11

Exhibit 16-2
  
-Refer to Exhibit 16-2.Suppose the economy starts at point A.Fed monetary policy shifts the AD curve to AD2.A rise in Real GDP is likely if the economy operates under __________ assumptions,such as wage and price __________.

Accepted Answer

A)  new classical; flexibility 
B)  new classical; inflexibilities 
C)  new Keynesian; flexibility 
D)  new Keynesian; inflexibilities 
A)  new classical; flexibility 
B)  new classical; inflexibilities 
C)  new Keynesian; flexibility 
D)  new Keynesian; inflexibilities

Question 12

An unexpected decrease in aggregate demand will cause

Accepted Answer

A)  a movement up the short-run Phillips curve. 
B)  a movement down the short-run Phillips curve. 
C)  an upward shift in the short-run Phillips curve. 
D)  a downward shift in the short-run Phillips curve. 
A)  a movement up the short-run Phillips curve. 
B)  a movement down the short-run Phillips curve. 
C)  an upward shift in the short-run Phillips curve. 
D)  a downward shift in the short-run Phillips curve.

Question 13

If stagflation is present the short-run Phillips curve is vertical.

Accepted Answer

A) True 
 B)False

Question 14

Exhibit 16-1
  
-Refer to Exhibit 16-1.According to new classical macroeconomists,if increases in aggregate demand are correctly anticipated,then the economy will move from point A to

Accepted Answer

A)  point B. 
B)  point C. 
C)  some point on SRPC2, above C. 
D)  some point on SRPC1, below A. 
A)  point B. 
B)  point C. 
C)  some point on SRPC2, above C. 
D)  some point on SRPC1, below A.

Question 15

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.In new Keynesian theory,the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

Accepted Answer

A)  by more 
B)  by less 
C)  by the same amount 
D)  faster 
E)  slower 
A)  by more 
B)  by less 
C)  by the same amount 
D)  faster 
E)  slower

Question 16

When everyone correctly anticipates that the Fed will buy government securities,then they know that prices will increase.Which of the following adjustments is not likely to occur?

Accepted Answer

A)  Workers will negotiate higher wages. 
B)  Suppliers of resources will demand higher prices for their resources. 
C)  Producers will prevent the price level from increasing and hurting their sales. 
D)  Producers will raise prices. 
A)  Workers will negotiate higher wages. 
B)  Suppliers of resources will demand higher prices for their resources. 
C)  Producers will prevent the price level from increasing and hurting their sales. 
D)  Producers will raise prices.

Question 17

Suppose that the Fed implements expansionary monetary policy that raises aggregate demand,but individuals incorrectly anticipate the policy measure (bias downward). According to new classical theory,in the short run the price level would ____________ and Real GDP would ______________. In the long run,new classical theory would predict that the price level would ___________compared to its original long-run equilibrium level and that Real GDP would ____________.

Accepted Answer

A)  rise; decline; rise; remain unchanged 
B)  rise; rise; rise; remain unchanged 
C)  rise; decline; remain unchanged; rise 
D)  fall; rise; remain unchanged; rise 
A)  rise; decline; rise; remain unchanged 
B)  rise; rise; rise; remain unchanged 
C)  rise; decline; remain unchanged; rise 
D)  fall; rise; remain unchanged; rise

Question 18

Exhibit 16-4
  
-Refer to Exhibit 16-4.If LRAS1 shifts to LRAS2,and this causes AD1 to shift to AD2,economists would call this a

Accepted Answer

A)  rational expectations cycle. 
B)  policy ineffectiveness proposition. 
C)  short run Phillips curve. 
D)  real business cycle. 
A)  rational expectations cycle. 
B)  policy ineffectiveness proposition. 
C)  short run Phillips curve. 
D)  real business cycle.

Question 19

If expectations are formed rationally,wages and prices are completely flexible in both the short run and the long run,and policy is correctly anticipated,increases in aggregate demand will stimulate the economy to higher levels of Real GDP in

Accepted Answer

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

Question 20

Events of the 1970s and early 1980s showed that

Accepted Answer

A)  the Phillips curve presents policymakers with a stable menu of choices. 
B)  cycles of unemployment and inflation rates appear to have gravitated around a 6 percent unemployment rate. 
C)  lower inflation rates are consistently accompanied by higher unemployment rates. 
D)  a tradeoff between inflation and unemployment may not always exist. 
E)  a and c 
A)  the Phillips curve presents policymakers with a stable menu of choices. 
B)  cycles of unemployment and inflation rates appear to have gravitated around a 6 percent unemployment rate. 
C)  lower inflation rates are consistently accompanied by higher unemployment rates. 
D)  a tradeoff between inflation and unemployment may not always exist. 
E)  a and c

Exam 16: Expectations Theory and the Economy

The original Phillips curve depicted an inverse relationship between wage inflation and unemployment.

According to Friedman,in which of the following situations is the economy in long-run equilibrium?

Real business cycle theory would emphasize the ability of a beneficial supply shock to shift the __________ curve rightward and __________ Real GDP.

According to rational expectations theory,

According to Milton Friedman,the reason there are two Phillips curves is because

The Samuelson and Solow Phillips curve suggested a(n)__________ relationship between the rate of change in __________ and the unemployment rate.

Exhibit 16-1 -Refer to Exhibit 16-1.Suppose the economy is currently at point B on the short-run Phillips curve,SRPC1.What could get the economy to move to point C on SRPC2?

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

The concept of rational expectations first appeared on the economic scene in _______,but it wasn't until the _____________ that it received more significant notice in the economics profession.

Milton Friedman argued that there is a

Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts at point A.Fed monetary policy shifts the AD curve to AD2.A rise in Real GDP is likely if the economy operates under __________ assumptions,such as wage and price __________.

An unexpected decrease in aggregate demand will cause

If stagflation is present the short-run Phillips curve is vertical.

Exhibit 16-1 -Refer to Exhibit 16-1.According to new classical macroeconomists,if increases in aggregate demand are correctly anticipated,then the economy will move from point A to

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.In new Keynesian theory,the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

When everyone correctly anticipates that the Fed will buy government securities,then they know that prices will increase.Which of the following adjustments is not likely to occur?

Exhibit 16-4 -Refer to Exhibit 16-4.If LRAS1 shifts to LRAS2,and this causes AD1 to shift to AD2,economists would call this a

If expectations are formed rationally,wages and prices are completely flexible in both the short run and the long run,and policy is correctly anticipated,increases in aggregate demand will stimulate the economy to higher levels of Real GDP in

Events of the 1970s and early 1980s showed that

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

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Economic Growth: Resources, Technology, Ideas, and Institutions

The Financial Crisis of 2007-2009

Debates in Macroeconomics Over the Role and Effects of Government

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Perfect Competition

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Monopolistic Competition, Oligopoly, and Game Theory

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Market Failure: Externalities, Public Goods, and Asymmetric Information

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Globalization and International Impacts on the Economy

The Economic Case For and Against Government: Five Topics Considered

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Agriculture: Problems, Policies, and Unintended Effects

Filters

Real business cycle theory would emphasize the ability of a beneficial supply shock to shift the curve rightward and Real GDP.

The Samuelson and Solow Phillips curve suggested a(n) relationship between the rate of change in and the unemployment rate.

Exhibit 16-1 -Refer to Exhibit 16-1.Suppose the economy is currently at point B on the short-run Phillips curve,SRPC₁.What could get the economy to move to point C on SRPC₂?

As the price level rises,real wage __and people choose to work _.

The concept of rational expectations first appeared on the economic scene in _,but it wasn't until the _______ that it received more significant notice in the economics profession.

Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts at point A.Fed monetary policy shifts the AD curve to AD₂.A rise in Real GDP is likely if the economy operates under assumptions,such as wage and price .

Exhibit 16-4 -Refer to Exhibit 16-4.If LRAS₁ shifts to LRAS₂,and this causes AD₁to shift to AD₂,economists would call this a