Exam 16: Expectations Theory and the Economy

Exhibit 16-4 -Refer to Exhibit 16-4. The economy is initially at point A, in long run equilibrium. A real business cycle would be represented by the following sequence of curve shifts:

Exhibit 16-3 -Refer to Exhibit 16-3. The economy is at point C. If a decrease in aggregate demand is correctly anticipated in the short run, new classical theory would predict

Exhibit 16-1 -Refer to Exhibit 16-1. Milton Friedman would most likely have called the vertical line on which points A and C are located the

Rational expectations are based on the past alone, while adaptive expectations are based on the past, the present, and the future.

New classical economists build their theories upon

Explain the difference between how adaptive expectations are formed and how rational expectations are formed. How does this difference affect the speed at which economic variables are expected to change?

The economist who won the Nobel Prize in Economics in 1995, and whose name is closely connected with rational expectations theory, is

Milton Friedman argued that there is a

Exhibit 16-6 -Refer to Exhibit 16-6. The economy is initially at point B. There is an unanticipated increase in aggregate demand, prices and wages are flexible, the economy is self-regulating, and people hold adaptive expectations. In the short run the economy will move to point __________ and in the long run the economy will be at point __________.

Which of the following changes would not be considered a likely source of changes in Real GDP according to real business cycle theory?

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

As long as some people anticipate policy, the economic consequences may be the same as if all persons do so.

The Phillips curve that Samuelson and Solow fitted to their data was

Stagflation is the simultaneous occurrence of

The economy is in long-run equilibrium when government unexpectedly increases aggregate demand. The expected inflation rate is slow to adjust to the higher (actual) inflation rate. If follows that in the short run, according to the Friedman natural rate theory, __________ rises and the __________ falls.

Rational expectations theory is also known as the Friedman fooling theory.

Exhibit 16-5 -Refer to Exhibit 16-5. If the economy is at point 6, and the natural unemployment rate exists at points 1, 4, and 5, it follows that

Which of the following assumptions is held by both the classical view and the new classical view?

One implication of the policy ineffectiveness proposition (PIP) is that expansionary __________ policy is not effective at raising __________.

New classical economists believe that if policy is correctly anticipated and if rational expectations hold, when the Fed increases the money supply the result will be a(n) ______________ in the price level and ____________________________.