Exam 16: Expectations Theory and the Economy

Exhibit 16-2 -Refer to Exhibit 16-2. Suppose the economy starts at point B. Fed monetary policy shifts the AD curve to AD₁. A recession is likely if the economy operates under __________ assumptions, which include wage and price __________.

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand. In new Keynesian theory, the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

Implicit in the new Keynesian theory is that individuals form their expectations adaptively.

Milton Friedman argued that as long as

In their 1960 article, Paul Samuelson and Robert Solow found

The difference between the new classical theory and the new Keynesian theory is the assumption of

One of the ideas that found a permanent place in macroeconomics after Milton Friedman's presidential address to the American Economic Association in 1967 was that

Implied in new Keynesian theory is that when policy is correctly anticipated, there is a tradeoff between inflation and unemployment in

Suppose that the government implements expansionary fiscal policy that raises aggregate demand, but the policy is unanticipated. 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 ____________.

According to a new Keynesian theorist, a correctly anticipated increase in aggregate demand will

The economy is initially in long-run equilibrium. Expectations are adaptive, prices and wages are flexible, and there is an unanticipated increase in aggregate demand. In the short run, the price level will be __________ than it was in long-run equilibrium and Real GDP will be __________ than it was in long-run equilibrium.

Stagflation

The concept of rational expectations first appeared on the economic scene in _______, but it wasn't until the _____________ that it received more significant notice in the economics profession.

Exhibit 16-10 -Refer to Exhibit 16-10. Assume that the starting point is point 1. Suppose that the government implements expansionary fiscal policy that raises aggregate demand. Which of the following best goes with the diagram shown?

The Samuelson and Solow Phillips curve suggested a(n) __________ relationship between the rate of change in __________ and the unemployment rate.

Suppose that the government implements expansionary fiscal policy that raises aggregate demand, but individuals incorrectly anticipate the policy measure (bias upward). 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 _____________.

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand. According to new classical theory, the price level will __________ and Real GDP will __________.

The original (1958) Phillips curve stated that

Exhibit 16-6 -Refer to Exhibit 16-6. The economy is initially in long-run equilibrium at point A. There is a correctly anticipated increase in aggregate demand, prices and wages are flexible, the economy is self-regulating, and people hold rational expectations. The economy will move to point

When everyone correctly anticipates that the Fed will buy government securities, then they know that prices will increase. Which of the following adjustments is not likely to occur?