Question 1

The original (1958) Phillips curve

Accepted Answer

A) showed that stagflation is inevitable. 
B) showed the tradeoff between the use of monetary and fiscal policy. 
C) has never been used as an important economic policy tool. 
D) suggested a tradeoff between wage inflation and the unemployment rate. 
E) none of the above 
A) showed that stagflation is inevitable. 
B) showed the tradeoff between the use of monetary and fiscal policy. 
C) has never been used as an important economic policy tool. 
D) suggested a tradeoff between wage inflation and the unemployment rate. 
E) none of the above D

Question 2

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  False

Question 3

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 B

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Exhibit 16-3
  
-Refer to Exhibit 16-3. The economy is at point A. According to the Friedman natural rate theory, in the long run after a rise in the money supply, the economy will be at point

Accepted Answer

A) A. 
B) B. 
C) C'. 
D) C. 
A) A. 
B) B. 
C) C'. 
D) C.

Question 6

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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 __________.

Accepted Answer

A) falls; falls; rises; fall; fall; less 
B) falls; rises; rises; fall; rise; more 
C) falls; rises; falls; fall; fall; less 
D) rises; rises; falls; fall; rise; more 
E) rises; falls; rises; fall; fall; more 
A) falls; falls; rises; fall; fall; less 
B) falls; rises; rises; fall; rise; more 
C) falls; rises; falls; fall; fall; less 
D) rises; rises; falls; fall; rise; more 
E) rises; falls; rises; fall; fall; more

Question 9

The simultaneous occurrence of high inflation and high unemployment is called

Accepted Answer

A) reverberation. 
B) disinflation. 
C) stagflation. 
D) "fooling." 
A) reverberation. 
B) disinflation. 
C) stagflation. 
D) "fooling."

Question 10

A person's real wage will fall if the

Accepted Answer

A) nominal wage falls. 
B) price level rises. 
C) nominal wage rises. 
D) price level falls. 
E) a and b 
A) nominal wage falls. 
B) price level rises. 
C) nominal wage rises. 
D) price level falls. 
E) a and b

Question 11

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?

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 12

Real business cycle theory emphasizes that an adverse supply shock will shift the LRAS curve leftward and cause a decline in Real GDP.

Accepted Answer

A) True 
 B)False

Question 13

Exhibit 16-2
  
-Refer to Exhibit 16-2. Suppose the economy starts at point B. Fed monetary policy shifts the AD curve to AD1. If policy is correctly anticipated and people hold rational expectations, according to new classical theory the economy in the short run will

Accepted Answer

A) move to A. 
B) stay at B. 
C) move to F. 
D) move to E. 
A) move to A. 
B) stay at B. 
C) move to F. 
D) move to E.

Question 14

Suppose that the Fed expects to increase the money supply by $54 billion, but economic agents expect that the increase will be closer to $81 billion. Using rational expectations theory, the result will be ______________ Real GDP and a ________________ price level.

Accepted Answer

A) lower; higher 
B) lower; lower 
C) higher; higher 
D) higher; lower 
A) lower; higher 
B) lower; lower 
C) higher; higher 
D) higher; lower

Question 15

As the price level falls, 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 16

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 17

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 18

Exhibit 16-2
  
-Refer to Exhibit 16-2. The Policy Ineffectiveness Proposition could be illustrated by a movement between points A and

Accepted Answer

A) D. 
B) B. 
C) C. 
D) F. 
A) D. 
B) B. 
C) C. 
D) F.

Question 19

The expected inflation rate is equal to the actual inflation rate. According to the (Friedman) natural rate theory, the economy is

Accepted Answer

A) in a recessionary gap. 
B) in an inflationary gap. 
C) at a point on the short-run Phillips curve, but not on the long-run Phillips curve. 
D) biased toward producing a higher percentage of services than goods. 
E) producing Natural Real GDP. 
A) in a recessionary gap. 
B) in an inflationary gap. 
C) at a point on the short-run Phillips curve, but not on the long-run Phillips curve. 
D) biased toward producing a higher percentage of services than goods. 
E) producing Natural Real GDP.

Question 20

In what ways does the original Phillips curve differ from the Phillips curve created by economists Samuelson and Solow? What conclusions did economists draw based on the findings of Phillips, Samuelson and Solow?

Accepted Answer

The original Phillips curve showed the i

Exam 16: Expectations Theory and the Economy

The original (1958) Phillips curve

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.

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.

Exhibit 16-3 -Refer to Exhibit 16-3. The economy is at point A. According to the Friedman natural rate theory, in the long run after a rise in the money supply, the economy will be at point

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

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 __________.

The simultaneous occurrence of high inflation and high unemployment is called

A person's real wage will fall if the

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?

Real business cycle theory emphasizes that an adverse supply shock will shift the LRAS curve leftward and cause a decline in Real GDP.

Exhibit 16-2 -Refer to Exhibit 16-2. Suppose the economy starts at point B. Fed monetary policy shifts the AD curve to AD1. If policy is correctly anticipated and people hold rational expectations, according to new classical theory the economy in the short run will

Suppose that the Fed expects to increase the money supply by $54 billion, but economic agents expect that the increase will be closer to $81 billion. Using rational expectations theory, the result will be ______________ Real GDP and a ________________ price level.

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

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

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?

Exhibit 16-2 -Refer to Exhibit 16-2. The Policy Ineffectiveness Proposition could be illustrated by a movement between points A and

The expected inflation rate is equal to the actual inflation rate. According to the (Friedman) natural rate theory, the economy is

In what ways does the original Phillips curve differ from the Phillips curve created by economists Samuelson and Solow? What conclusions did economists draw based on the findings of Phillips, Samuelson and Solow?

What Economics Is About

Production Possibilities Frontier Framework

Supply and Demand Theory

Prices Free Controlled and Relative

Supply Demand and Price Applications

Macroeconomic Measurements Part I Prices and Unemployment

Macroeconomic Measurements Part II 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

Debates in Macroeconomics Over the Role and Effects of Government

Elasticity

Consumer Choice 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

The Economic Case for and Against Government Five Topics Considered

Stocks Bonds Futures and Options

Filters

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 .

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 16-2 -Refer to Exhibit 16-2. Suppose the economy starts at point B. Fed monetary policy shifts the AD curve to AD₁. If policy is correctly anticipated and people hold rational expectations, according to new classical theory the economy in the short run will

Suppose that the Fed expects to increase the money supply by $54 billion, but economic agents expect that the increase will be closer to $81 billion. Using rational expectations theory, the result will be Real GDP and a __ price level.

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