Question 1

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 2

A person's real wage will fall if the nominal wage falls, the price level rises, or both.

Accepted Answer

A) True 
 B)False

Question 3

The Friedman natural rate theory holds that there is an inverse relationship between inflation and unemployment in the long run, but not in the short run.

Accepted Answer

A) True 
 B)False

Question 4

According to new Keynesian theory, if 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 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 5

One of the key assumptions of the new classical theory is that individuals form their expectations rationally.

Accepted Answer

A) True 
 B)False

Question 6

New Keynesian theory differs from new classical theory in that New Keynesian theory assumes that wages and prices are not completely flexible in the short-run, while fully flexible wages and prices are an assumption of new classical theory.

Accepted Answer

A) True 
 B)False

Question 7

Under new Keynesian theory, a correctly anticipated decrease in aggregate demand will lead to __________ in Real GDP and __________ in the price level.

Accepted Answer

A) a decrease; a decrease 
B) no change; an increase 
C) no change; no change 
D) an increase; an increase 
E) an increase; no change 
A) a decrease; a decrease 
B) no change; an increase 
C) no change; no change 
D) an increase; an increase 
E) an increase; no change

Question 8

Although the possibility exists for an economy to experience stagflation, it has never actually happened in the United States.

Accepted Answer

A) True 
 B)False

Question 9

New classical economists believe that there is

Accepted Answer

A) a short-run tradeoff between inflation and unemployment when policy is unanticipated. 
B) a short-run tradeoff between inflation and unemployment when policy is correctly anticipated. 
C) no short-run tradeoff between inflation and unemployment when policy is correctly anticipated. 
D) a and b 
E) a and c 
A) a short-run tradeoff between inflation and unemployment when policy is unanticipated. 
B) a short-run tradeoff between inflation and unemployment when policy is correctly anticipated. 
C) no short-run tradeoff between inflation and unemployment when policy is correctly anticipated. 
D) a and b 
E) a and c

Question 10

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 11

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 12

Explain why there is an inverse relationship between wage inflation and unemployment as aggregate demand changes.

Accepted Answer

In an economy with increasing aggregate

Question 13

As incorrectly low inflation expectations catch up with the higher actual inflation rate, the SRAS curve shifts __________ and the short-run Phillips curve shifts __________.

Accepted Answer

A) leftward; downward 
B) rightward; upward 
C) leftward; upward 
D) rightward; downward 
A) leftward; downward 
B) rightward; upward 
C) leftward; upward 
D) rightward; downward

Question 14

Describe the policy ineffectiveness proposition (PIP). Be sure to state which economic theory the PIP is associated with and the assumptions that are necessary for this argument to hold.

Accepted Answer

The PIP is associated with the new class

Question 15

For the period 1961 to 1969, the Phillips curve for the United States displayed the same shape that A. W. Phillips found for the United Kingdom for the period 1861 to 1913---it was

Accepted Answer

A) horizontal. 
B) vertical. 
C) downward sloping. 
D) upward sloping. 
A) horizontal. 
B) vertical. 
C) downward sloping. 
D) upward sloping.

Question 16

Exhibit 16-5
  
-Refer to Exhibit 16-5. If the economy is at point 3, and the natural unemployment rate exists at points 1, 4, and 5, it follows that

Accepted Answer

A) Real GDP is greater than Natural Real GDP. 
B) Real GDP is less than Natural Real GDP. 
C) Real GDP is the same as Natural Real GDP. 
D) the economy is in a recessionary gap. 
E) b and d 
A) Real GDP is greater than Natural Real GDP. 
B) Real GDP is less than Natural Real GDP. 
C) Real GDP is the same as Natural Real GDP. 
D) the economy is in a recessionary gap. 
E) b and d

Question 17

In which of the following economic theories is it possible for an increase in the money supply to lead to a decrease in Real GDP in the short run?

Accepted Answer

A) Keynesian theory 
B) Monetarist theory 
C) New classical theory 
D) a and b 
E) a and c 
A) Keynesian theory 
B) Monetarist theory 
C) New classical theory 
D) a and b 
E) a and c

Question 18

The terms rational expectations and adaptive expectations are two different names for the same concept.

Accepted Answer

A) True 
 B)False

Question 19

The main difference between new classical and new Keynesian theory is with respect to the assumption of

Accepted Answer

A) how expectations are formed. 
B) how flexible wages and prices are. 
C) the slope of the SRAS curve. 
D) the slope of the AD curve. 
A) how expectations are formed. 
B) how flexible wages and prices are. 
C) the slope of the SRAS curve. 
D) the slope of the AD curve.

Question 20

If expectations are formed rationally, wages and prices are completely flexible in the short run and policy is correctly anticipated, increases in aggregate demand will

Accepted Answer

A) cause lower short-run price level increases than a Keynesian would expect. 
B) cause higher short-run price level increases than a Keynesian would expect. 
C) not impact the general price level. 
D) produce both increases and decreases in the price level at different times. 
A) cause lower short-run price level increases than a Keynesian would expect. 
B) cause higher short-run price level increases than a Keynesian would expect. 
C) not impact the general price level. 
D) produce both increases and decreases in the price level at different times.

Exam 16: Expectations Theory and the Economy

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

A person's real wage will fall if the nominal wage falls, the price level rises, or both.

The Friedman natural rate theory holds that there is an inverse relationship between inflation and unemployment in the long run, but not in the short run.

According to new Keynesian theory, if policy is correctly anticipated, increases in aggregate demand will stimulate the economy to higher levels of Real GDP and lower levels of unemployment in

One of the key assumptions of the new classical theory is that individuals form their expectations rationally.

New Keynesian theory differs from new classical theory in that New Keynesian theory assumes that wages and prices are not completely flexible in the short-run, while fully flexible wages and prices are an assumption of new classical theory.

Under new Keynesian theory, a correctly anticipated decrease in aggregate demand will lead to __________ in Real GDP and __________ in the price level.

Although the possibility exists for an economy to experience stagflation, it has never actually happened in the United States.

New classical economists believe that there is

According to rational expectations theory,

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?

Explain why there is an inverse relationship between wage inflation and unemployment as aggregate demand changes.

As incorrectly low inflation expectations catch up with the higher actual inflation rate, the SRAS curve shifts __________ and the short-run Phillips curve shifts __________.

Describe the policy ineffectiveness proposition (PIP). Be sure to state which economic theory the PIP is associated with and the assumptions that are necessary for this argument to hold.

For the period 1961 to 1969, the Phillips curve for the United States displayed the same shape that A. W. Phillips found for the United Kingdom for the period 1861 to 1913---it was

Exhibit 16-5 -Refer to Exhibit 16-5. If the economy is at point 3, and the natural unemployment rate exists at points 1, 4, and 5, it follows that

In which of the following economic theories is it possible for an increase in the money supply to lead to a decrease in Real GDP in the short run?

The terms rational expectations and adaptive expectations are two different names for the same concept.

The main difference between new classical and new Keynesian theory is with respect to the assumption of

If expectations are formed rationally, wages and prices are completely flexible in the short run and policy is correctly anticipated, increases in aggregate demand will

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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

Under new Keynesian theory, a correctly anticipated decrease in aggregate demand will lead to in Real GDP and in the price level.

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 incorrectly low inflation expectations catch up with the higher actual inflation rate, the SRAS curve shifts and the short-run Phillips curve shifts .