Question 1

Milton Friedman argued that the economy is not in long-run equilibrium if the expected inflation rate __________ the actual inflation rate.

Accepted Answer

A) is less than 
B) is greater than 
C) equals 
D) a and b 
A) is less than 
B) is greater than 
C) equals 
D) a and b

Question 2

Starting from long-run equilibrium, if the public anticipates that policymakers will increase aggregate demand by less than policymakers do increase aggregate demand, and if the short-run aggregate supply curve fully adjusts to the (incorrectly) anticipated increase in aggregate demand, then Real GDP will __________ and the price level will __________.

Accepted Answer

A) rise; rise 
B) decline; fall 
C) stay constant; rise 
D) decline; rise 
A) rise; rise 
B) decline; fall 
C) stay constant; rise 
D) decline; rise

Question 3

The Friedman natural rate theory is built upon

Accepted Answer

A) rational expectations. 
B) adaptive expectations. 
C) flexible wages and prices. 
D) the assumption of one Phillips curve. 
E) b and c 
A) rational expectations. 
B) adaptive expectations. 
C) flexible wages and prices. 
D) the assumption of one Phillips curve. 
E) b and c

Question 4

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

Accepted Answer

A) aggregate GDP. 
B) aggregate spending. 
C) aggregate demand. 
D) aggregate consumption. 
E) long-run aggregate supply. 
A) aggregate GDP. 
B) aggregate spending. 
C) aggregate demand. 
D) aggregate consumption. 
E) long-run aggregate supply.

Question 5

According to Milton Friedman, there are two Phillips curves, a short-run one and a long-run one.

Accepted Answer

A) True 
 B)False

Question 6

Stagflation exists when an economy is experiencing high rates of both unemployment and inflation.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) aggregate demand. 
B) the money supply. 
C) the expected inflation rate. 
D) prices. 
E) none of the above 
A) aggregate demand. 
B) the money supply. 
C) the expected inflation rate. 
D) prices. 
E) none of the above

Question 8

According to the real business cycle theory, business cycle contractions are generally caused by

Accepted Answer

A) the self-interest of politicians. 
B) decreases in business investment. 
C) decreases in the growth rate of the money supply. 
D) decreases in the economy's capacity to produce. 
E) all of the above 
A) the self-interest of politicians. 
B) decreases in business investment. 
C) decreases in the growth rate of the money supply. 
D) decreases in the economy's capacity to produce. 
E) all of the above

Question 9

The original Phillips curve depicted the relationship between

Accepted Answer

A) price inflation and unemployment. 
B) price inflation and employment. 
C) wage inflation and unemployment. 
D) wage inflation and employment. 
A) price inflation and unemployment. 
B) price inflation and employment. 
C) wage inflation and unemployment. 
D) wage inflation and employment.

Question 10

Milton Friedman argued that there

Accepted Answer

A) are two Phillips curves, a short-run one and a long-run one. 
B) are three Phillips curves, a short-run one, a long-run one, and one in stagflation. 
C) is one Phillips curve, and it is vertical. 
D) is one Phillips curve, and it is nearly flat or horizontal. 
A) are two Phillips curves, a short-run one and a long-run one. 
B) are three Phillips curves, a short-run one, a long-run one, and one in stagflation. 
C) is one Phillips curve, and it is vertical. 
D) is one Phillips curve, and it is nearly flat or horizontal.

Question 11

Exhibit 16-5
  
-Refer to Exhibit 16-5. If the economy continually moves between points 1, 2, and 3, it follows that

Accepted Answer

A) this economy has not experienced stagflation. 
B) a tradeoff exists between inflation and unemployment. 
C) when inflation is higher, unemployment is lower. 
D) a and b 
E) a, b, and c 
A) this economy has not experienced stagflation. 
B) a tradeoff exists between inflation and unemployment. 
C) when inflation is higher, unemployment is lower. 
D) a and b 
E) a, b, and c

Question 12

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 13

In the 1970s and early 1980s, the U.S. economy experienced

Accepted Answer

A) stagflation. 
B) low inflation and low unemployment. 
C) high inflation and low unemployment. 
D) high inflation and high unemployment. 
E) a and d 
A) stagflation. 
B) low inflation and low unemployment. 
C) high inflation and low unemployment. 
D) high inflation and high unemployment. 
E) a and d

Question 14

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

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 in not 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 in not the short run.

Question 15

Describe the sequence of events that real business cycle theorists would use to explain how an adverse supply shock would impact the economy. Use your answer to explain why it is easy to confuse cause and effect between changes originating on the supply side and those that begin on the demand side.

Accepted Answer

An adverse supply shock would reduce the

Question 16

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

Accepted Answer

A) the former was based on American data, while the latter was based on British data. 
B) the former measured price inflation rates, while the latter used wage inflation rates. 
C) the former was based on British data, while the latter was based on American data. 
D) the former measured nominal GDP, while the latter used Real GDP. 
E) a and b 
A) the former was based on American data, while the latter was based on British data. 
B) the former measured price inflation rates, while the latter used wage inflation rates. 
C) the former was based on British data, while the latter was based on American data. 
D) the former measured nominal GDP, while the latter used Real GDP. 
E) a and b

Question 17

The real business cycle theory holds that the business cycle

Accepted Answer

A) originates as a result of factors affecting aggregate supply. 
B) originates as a result of factors affecting aggregate demand. 
C) is the result of correctly anticipated policies. 
D) is the result of incorrectly anticipated policies. 
A) originates as a result of factors affecting aggregate supply. 
B) originates as a result of factors affecting aggregate demand. 
C) is the result of correctly anticipated policies. 
D) is the result of incorrectly anticipated policies.

Question 18

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 19

New classical economists believe that monetary and fiscal policies are never effective.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

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

Exam 16: Expectations Theory and the Economy

Milton Friedman argued that the economy is not in long-run equilibrium if the expected inflation rate __________ the actual inflation rate.

The Friedman natural rate theory is built upon

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

According to Milton Friedman, there are two Phillips curves, a short-run one and a long-run one.

Stagflation exists when an economy is experiencing high rates of both unemployment and inflation.

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

According to the real business cycle theory, business cycle contractions are generally caused by

The original Phillips curve depicted the relationship between

Milton Friedman argued that there

Exhibit 16-5 -Refer to Exhibit 16-5. If the economy continually moves between points 1, 2, and 3, it follows that

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

In the 1970s and early 1980s, the U.S. economy experienced

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

Describe the sequence of events that real business cycle theorists would use to explain how an adverse supply shock would impact the economy. Use your answer to explain why it is easy to confuse cause and effect between changes originating on the supply side and those that begin on the demand side.

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

The real business cycle theory holds that the business cycle

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.

New classical economists believe that monetary and fiscal policies are never effective.

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

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