Question 1

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

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

An increase in the actual inflation rate is represented by a

Accepted Answer

A) movement up and along a given Phillips curve. 
B) movement down and along a given Phillips curve. 
C) leftward shift in the Phillips curve. 
D) rightward shift in the Phillips curve. 
A) movement up and along a given Phillips curve. 
B) movement down and along a given Phillips curve. 
C) leftward shift in the Phillips curve. 
D) rightward shift in the Phillips curve.

Question 4

If there is a stable downward-sloping Phillips curve, it follows that an economy can choose the combination of

Accepted Answer

A) high unemployment and low inflation. 
B) low unemployment and high inflation. 
C) moderate unemployment and moderate inflation. 
D) low inflation and low unemployment. 
E) a, b, and c 
A) high unemployment and low inflation. 
B) low unemployment and high inflation. 
C) moderate unemployment and moderate inflation. 
D) low inflation and low unemployment. 
E) a, b, and c

Question 5

The difference between new classical theory and new Keynesian theory is that

Accepted Answer

A) in new classical theory wages are assumed to be flexible, and in new Keynesian theory wages are assumed to be somewhat inflexible. 
B) in new classical theory wages are assumed to be somewhat inflexible, and in new Keynesian theory wages are assumed to be flexible. 
C) adaptive expectations is the dominant expectations theory in new classical theory, and rational expectations is the dominant expectations theory in new Keynesian theory. 
D) in new Keynesian theory the short-run aggregate supply curve is vertical, and in new classical theory the short-run aggregate supply curve is upward sloping. 
A) in new classical theory wages are assumed to be flexible, and in new Keynesian theory wages are assumed to be somewhat inflexible. 
B) in new classical theory wages are assumed to be somewhat inflexible, and in new Keynesian theory wages are assumed to be flexible. 
C) adaptive expectations is the dominant expectations theory in new classical theory, and rational expectations is the dominant expectations theory in new Keynesian theory. 
D) in new Keynesian theory the short-run aggregate supply curve is vertical, and in new classical theory the short-run aggregate supply curve is upward sloping.

Question 6

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 7

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

Accepted Answer

A) an increase in aggregate demand combined with an unchanged expected inflation rate 
B) an increase in aggregate demand combined with a rise in the expected inflation rate 
C) a rise in the expected inflation rate 
D) a decrease in aggregate demand combined with an unchanged expected inflation rate 
E) none of the above 
A) an increase in aggregate demand combined with an unchanged expected inflation rate 
B) an increase in aggregate demand combined with a rise in the expected inflation rate 
C) a rise in the expected inflation rate 
D) a decrease in aggregate demand combined with an unchanged expected inflation rate 
E) none of the above

Question 8

Which theory of the business cycle emphasizes initiating changes in aggregate supply?

Accepted Answer

A) the Friedman "fooling" theory 
B) the real business cycle theory 
C) the Keynesian theory 
D) the new classical theory 
A) the Friedman "fooling" theory 
B) the real business cycle theory 
C) the Keynesian theory 
D) the new classical theory

Question 9

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 _______________.

Accepted Answer

A) rise; more; rightward 
B) rise; less; leftward 
C) fall; more; rightward 
D) fall; less; leftward 
A) rise; more; rightward 
B) rise; less; leftward 
C) fall; more; rightward 
D) fall; less; leftward

Question 10

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

Accepted Answer

A) rise; more; rightward 
B) rise; less; leftward 
C) fall; more; rightward 
D) fall; less; leftward 
A) rise; more; rightward 
B) rise; less; leftward 
C) fall; more; rightward 
D) fall; less; leftward

Question 11

New Keynesian theorists argue that

Accepted Answer

A) price and wage adjustments in response to policy changes often overcompensate and cause further price disruptions. 
B) prices and wages may not be free to adjust in response to policy changes. 
C) unions and big business have considerable power and often choose not to change wages and prices so as to deliberately offset policy changes enacted by the government. 
D) the Fed and the Congress rarely do what they say they will do, so one should never listen to what they say. 
E) new classical rational expectations theories about how expectations are formed are completely wrong. 
A) price and wage adjustments in response to policy changes often overcompensate and cause further price disruptions. 
B) prices and wages may not be free to adjust in response to policy changes. 
C) unions and big business have considerable power and often choose not to change wages and prices so as to deliberately offset policy changes enacted by the government. 
D) the Fed and the Congress rarely do what they say they will do, so one should never listen to what they say. 
E) new classical rational expectations theories about how expectations are formed are completely wrong.

Question 12

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 13

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 14

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 15

Expectations theory tells us that what people think can impact the economy.

Accepted Answer

A) True 
 B)False

Question 16

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.

Accepted Answer

A) A 
B) B 
C) C 
D) D 
E) E 
A) A 
B) B 
C) C 
D) D 
E) E

Question 17

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

Accepted Answer

A) short-run Phillips curve will be upward sloping, but the long-run Phillips curve will be downward-sloping. 
B) long-run Phillips curve will be upward sloping, but the short-run Phillips curve will be downward-sloping. 
C) short-run Phillips curve will be upward sloping, but the long-run Phillips curve will be vertical. 
D) long run Phillips curve will be upward sloping, but the short-run Phillips curve will be vertical. 
E) short- and long-run Phillips curves will be vertical. 
A) short-run Phillips curve will be upward sloping, but the long-run Phillips curve will be downward-sloping. 
B) long-run Phillips curve will be upward sloping, but the short-run Phillips curve will be downward-sloping. 
C) short-run Phillips curve will be upward sloping, but the long-run Phillips curve will be vertical. 
D) long run Phillips curve will be upward sloping, but the short-run Phillips curve will be vertical. 
E) short- and long-run Phillips curves will be vertical.

Question 18

The Friedman natural rate theory implies that 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 19

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 20

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.

Accepted Answer

A) correctly; adaptively; inflexible 
B) correctly; rationally; flexible 
C) incorrectly; adaptively; inflexible 
D) incorrectly; rationally; flexible 
E) correctly; rationally; inflexible 
A) correctly; adaptively; inflexible 
B) correctly; rationally; flexible 
C) incorrectly; adaptively; inflexible 
D) incorrectly; rationally; flexible 
E) correctly; rationally; inflexible

Exam 16: Expectations Theory and the Economy

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

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

An increase in the actual inflation rate is represented by a

If there is a stable downward-sloping Phillips curve, it follows that an economy can choose the combination of

The difference between new classical theory and new Keynesian theory is that

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

Which theory of the business cycle emphasizes initiating changes in aggregate supply?

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 _______________.

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

New Keynesian theorists argue that

If the public has rational expectations,

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

An unexpected decrease in aggregate demand will cause

Expectations theory tells us that what people think can impact the economy.

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

The Friedman natural rate theory implies that there is a tradeoff between inflation and unemployment in

The Friedman natural rate theory states that

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.

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

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

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 _____.

A fall in the expected price level leads to an expectation that real wages will , which will cause people to work , shifting the SRAS curve _____.

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.