Question 1

The Samuelson-Solow version of the Phillips curve showed the relationship between unemployment rates and

Accepted Answer

A) Real GDP growth rates. 
B) price inflation rates. 
C) wage inflation rates. 
D) imports. 
A) Real GDP growth rates. 
B) price inflation rates. 
C) wage inflation rates. 
D) imports.

Question 2

Stagflation consists of

Accepted Answer

A) high inflation and low unemployment. 
B) low inflation and high unemployment. 
C) high inflation and high unemployment. 
D) high unemployment and an economy in a deep recession. 
E) none of the above 
A) high inflation and low unemployment. 
B) low inflation and high unemployment. 
C) high inflation and high unemployment. 
D) high unemployment and an economy in a deep recession. 
E) none of the above

Question 3

Exhibit 16-3
  
-Refer to Exhibit 16-3. The economy is at point A. As the result of an unexpected increase in aggregate demand, in the short run, the Friedman natural rate theory would predict

Accepted Answer

A) movement to point B. 
B) movement to point C. 
C) movement to point C'. 
D) no movement from point A. 
A) movement to point B. 
B) movement to point C. 
C) movement to point C'. 
D) no movement from point A.

Question 4

The economy was in long-run equilibrium when aggregate demand increased. At this point in time, the expected inflation has started to adjust to the new higher actual inflation rate. According to the (Friedman) natural rate theory, this means the unemployment rate in the economy must currently be

Accepted Answer

A) decreasing. 
B) increasing. 
C) higher than it was in long-run equilibrium. 
D) equal to what it was in long-run equilibrium. 
E) There is not enough information to answer the question. 
A) decreasing. 
B) increasing. 
C) higher than it was in long-run equilibrium. 
D) equal to what it was in long-run equilibrium. 
E) There is not enough information to answer the question.

Question 5

One of the arguments supporting new classical theory is the policy ineffectiveness proposition (PIP).

Accepted Answer

A) True 
 B)False

Question 6

The economy is in long-run equilibrium when there is an incorrectly anticipated increase in aggregate demand brought about by expansionary monetary policy. Specifically, aggregate demand increases by more than people anticipate (bias downward). According to new classical theory, the price level will __________ and Real GDP will __________ in the short run. In the long run, the price level will be __________ than it was before aggregate demand increased.

Accepted Answer

A) rise; fall; higher 
B) rise; rise; higher 
C) fall; rise; lower 
D) fall; rise; higher 
E) rise; rise; lower 
A) rise; fall; higher 
B) rise; rise; higher 
C) fall; rise; lower 
D) fall; rise; higher 
E) rise; rise; lower

Question 7

If expectations are formed rationally, wages and prices are completely flexible in both the short run and the long run, and policy is correctly anticipated, increases in aggregate demand will stimulate the economy to higher levels of Real GDP 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 8

According to the original Phillips curve, the cost of reducing the unemployment rate in the short run is a

Accepted Answer

A) fall in Real GDP. 
B) fall in nominal GDP. 
C) lower rate of price inflation. 
D) higher rate of wage inflation. 
A) fall in Real GDP. 
B) fall in nominal GDP. 
C) lower rate of price inflation. 
D) higher rate of wage inflation.

Question 9

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 short run the economy moves to point

Accepted Answer

A) A. 
B) B. 
C) C. 
D) D. 
A) A. 
B) B. 
C) C. 
D) D.

Question 10

Events of the 1970s and early 1980s showed that

Accepted Answer

A) the Phillips curve presents policymakers with a stable menu of choices. 
B) cycles of unemployment and inflation rates appear to have gravitated around a 6 percent unemployment rate. 
C) lower inflation rates are consistently accompanied by higher unemployment rates. 
D) a tradeoff between inflation and unemployment may not always exist. 
E) a and c 
A) the Phillips curve presents policymakers with a stable menu of choices. 
B) cycles of unemployment and inflation rates appear to have gravitated around a 6 percent unemployment rate. 
C) lower inflation rates are consistently accompanied by higher unemployment rates. 
D) a tradeoff between inflation and unemployment may not always exist. 
E) a and c

Question 11

Suppose that in a new classical model the public anticipates that policymakers will increase aggregate demand. However, aggregate demand increases by less than what the public anticipated. The result in the short run is that Real GDP ____________ and the price level ____________.

Accepted Answer

A) decreases; decreases 
B) increases; increases 
C) increases; decreases 
D) decreases; increases 
A) decreases; decreases 
B) increases; increases 
C) increases; decreases 
D) decreases; increases

Question 12

Exhibit 16-2
  
-Refer to Exhibit 16-2. Suppose the economy starts at point A. The AD curve shifts from AD1 to AD2 and the public perfectly anticipates this. Under new Keynesian macroeconomic assumptions, the most likely short-run equilibrium point will be

Accepted Answer

A) point B. 
B) point E. 
C) somewhere on the line between point D and point B. 
D) somewhere on the line between point E and point B. 
A) point B. 
B) point E. 
C) somewhere on the line between point D and point B. 
D) somewhere on the line between point E and point B.

Question 13

Wages and prices are assumed to be completely inflexible in the new classical theory.

Accepted Answer

A) True 
 B)False

Question 14

According to new classical economists, if a decrease in aggregate demand is correctly anticipated, the short-run aggregate supply curve will shift __________ at the same time the AD curve shifts _________ so that there will be no change in Real GDP.

Accepted Answer

A) rightward; rightward 
B) leftward; leftward 
C) leftward; rightward 
D) rightward; leftward 
E) none of the above 
A) rightward; rightward 
B) leftward; leftward 
C) leftward; rightward 
D) rightward; leftward 
E) none of the above

Question 15

As the price level rises, real wage ____________and people choose to work ___________.

Accepted Answer

A) rises; more 
B) rises; less 
C) falls; more 
D) falls; less 
A) rises; more 
B) rises; less 
C) falls; more 
D) falls; less

Question 16

Samuelson and Solow, in their 1960 study of the Phillips curve as it applies to the U.S. experience, argued that there was a tradeoff between inflation and unemployment. Later experience showed their analysis to be

Accepted Answer

A) entirely correct in every situation. 
B) generally correct, but it could not explain stagflation. 
C) wholly wrong in every situation. 
D) in general agreement with rational expectations theory. 
E) capable of explaining stagflation, but not other economic scenarios. 
A) entirely correct in every situation. 
B) generally correct, but it could not explain stagflation. 
C) wholly wrong in every situation. 
D) in general agreement with rational expectations theory. 
E) capable of explaining stagflation, but not other economic scenarios.

Question 17

Two key assumptions of new Keynesian theory include:

Accepted Answer

A) (1) people hold rational expectations, and (2) wages and prices are not completely flexible in the short run. 
B) (1) people hold adaptive expectations, and (2) wages and prices are inflexible. 
C) (1) people hold rational expectations, and (2) wages and prices are flexible. 
D) (1) people hold neither adaptive nor rational expectations and (2) prices are inflexible. 
E) none of the above 
A) (1) people hold rational expectations, and (2) wages and prices are not completely flexible in the short run. 
B) (1) people hold adaptive expectations, and (2) wages and prices are inflexible. 
C) (1) people hold rational expectations, and (2) wages and prices are flexible. 
D) (1) people hold neither adaptive nor rational expectations and (2) prices are inflexible. 
E) none of the above

Question 18

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

Accepted Answer

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

Question 19

An unanticipated decrease in aggregate demand will cause an upward shift in the short-run Phillips curve.

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 16-8
  
-Refer to Exhibit 16-8. Assume that the starting point is point 1. Suppose that the Fed implements expansionary monetary policy that raises aggregate demand. Which of the following best goes with the diagram shown?

Accepted Answer

A) New classical theory with policy incorrectly anticipated, bias downward 
B) New classical theory with policy incorrectly anticipated, bias upward 
C) Real business cycle theory 
D) New classical theory with policy unanticipated 
E) Policy ineffectiveness proposition (PIP) 
A) New classical theory with policy incorrectly anticipated, bias downward 
B) New classical theory with policy incorrectly anticipated, bias upward 
C) Real business cycle theory 
D) New classical theory with policy unanticipated 
E) Policy ineffectiveness proposition (PIP)

Exam 16: Expectations Theory and the Economy

The Samuelson-Solow version of the Phillips curve showed the relationship between unemployment rates and

Stagflation consists of

Exhibit 16-3 -Refer to Exhibit 16-3. The economy is at point A. As the result of an unexpected increase in aggregate demand, in the short run, the Friedman natural rate theory would predict

The economy was in long-run equilibrium when aggregate demand increased. At this point in time, the expected inflation has started to adjust to the new higher actual inflation rate. According to the (Friedman) natural rate theory, this means the unemployment rate in the economy must currently be

One of the arguments supporting new classical theory is the policy ineffectiveness proposition (PIP).

If expectations are formed rationally, wages and prices are completely flexible in both the short run and the long run, and policy is correctly anticipated, increases in aggregate demand will stimulate the economy to higher levels of Real GDP in

According to the original Phillips curve, the cost of reducing the unemployment rate in the short run is a

Events of the 1970s and early 1980s showed that

Suppose that in a new classical model the public anticipates that policymakers will increase aggregate demand. However, aggregate demand increases by less than what the public anticipated. The result in the short run is that Real GDP ____________ and the price level ____________.

Exhibit 16-2 -Refer to Exhibit 16-2. Suppose the economy starts at point A. The AD curve shifts from AD1 to AD2 and the public perfectly anticipates this. Under new Keynesian macroeconomic assumptions, the most likely short-run equilibrium point will be

Wages and prices are assumed to be completely inflexible in the new classical theory.

According to new classical economists, if a decrease in aggregate demand is correctly anticipated, the short-run aggregate supply curve will shift __________ at the same time the AD curve shifts _________ so that there will be no change in Real GDP.

As the price level rises, real wage ____________and people choose to work ___________.

Samuelson and Solow, in their 1960 study of the Phillips curve as it applies to the U.S. experience, argued that there was a tradeoff between inflation and unemployment. Later experience showed their analysis to be

Two key assumptions of new Keynesian theory include:

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

An unanticipated decrease in aggregate demand will cause an upward shift in the short-run Phillips curve.

Exhibit 16-8 -Refer to Exhibit 16-8. Assume that the starting point is point 1. Suppose that the Fed implements expansionary monetary policy that raises aggregate demand. Which of the following best goes with the diagram shown?

What Economics Is About

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Prices Free Controlled and Relative

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Macroeconomic Measurements Part I Prices and Unemployment

Macroeconomic Measurements Part II Gdp and Real Gdp

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Classical Macroeconomics and the Self Regulating Economy

Keynesian Macroeconomics and Economic Instability a Critique of the Self Regulating Economy

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Suppose that in a new classical model the public anticipates that policymakers will increase aggregate demand. However, aggregate demand increases by less than what the public anticipated. The result in the short run is that Real GDP and the price level .

Exhibit 16-2 -Refer to Exhibit 16-2. Suppose the economy starts at point A. The AD curve shifts from AD₁ to AD₂ and the public perfectly anticipates this. Under new Keynesian macroeconomic assumptions, the most likely short-run equilibrium point will be

According to new classical economists, if a decrease in aggregate demand is correctly anticipated, the short-run aggregate supply curve will shift __ at the same time the AD curve shifts _ so that there will be no change in Real GDP.

As the price level rises, real wage __and people choose to work _.