Question 1

According to adaptive expectations theory, expansionary monetary and fiscal policies to reduce the unemployment rate are:

Accepted Answer

A) useless in the long run. 
B) useless in the short run. 
C) ineffective on the price level. 
D) None of these. 
A) useless in the long run. 
B) useless in the short run. 
C) ineffective on the price level. 
D) None of these.

Question 2

Many economists argue that, in the long run, the economy self-corrects and achieves full employment. This argument is known as the:

Accepted Answer

A) natural rate hypothesis. 
B) incomes policy approach. 
C) political business cycle theory. 
D) Keynesian cross model. 
A) natural rate hypothesis. 
B) incomes policy approach. 
C) political business cycle theory. 
D) Keynesian cross model.

Question 3

The long-run Phillips curve is a(n)____ line at the natural rate of unemployment.

Accepted Answer

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

Question 4

The "WIN" button approach to breaking a wage-price spiral was proposed by President Ford to a joint session of Congress.

Accepted Answer

A) True 
 B)False

Question 5

The hypothesis that people believe the best indicator of the future is the recent past is known as:

Accepted Answer

A) rational expectations. 
B) adaptive expectations. 
C) lagged expectations. 
D) trend expectations. 
A) rational expectations. 
B) adaptive expectations. 
C) lagged expectations. 
D) trend expectations.

Question 6

The hypothesis that people use all available information to predict the future is known as:

Accepted Answer

A) rational expectations. 
B) adaptive expectations. 
C) lagged expectations. 
D) trend expectations. 
A) rational expectations. 
B) adaptive expectations. 
C) lagged expectations. 
D) trend expectations.

Question 7

U.S. macroeconomic data show that a stable Phillips curve existed during the 1960s.

Accepted Answer

A) True 
 B)False

Question 8

According to the adaptive expectations theory, people form their expectations of the future on the basis of future expectations.

Accepted Answer

A) True 
 B)False

Question 9

The relationship between inflation and unemployment shown along a Phillips curve is a(n):

Accepted Answer

A) direct relationship. 
B) quadratic relationship. 
C) exponential relationship. 
D) inverse relationship. 
E) parabolic relationship. 
A) direct relationship. 
B) quadratic relationship. 
C) exponential relationship. 
D) inverse relationship. 
E) parabolic relationship.

Question 10

Incomes policies reject wage-price controls and guidelines.

Accepted Answer

A) True 
 B)False

Question 11

Most economists agree that the government should use incomes policies to control inflation during peacetime.

Accepted Answer

A) True 
 B)False

Question 12

The Phillips Curve shows the trade-off between:

Accepted Answer

A) unemployment and output. 
B) inflation and output. 
C) unemployment and inflation. 
D) imports and exports. 
E) unemployment and imports. 
A) unemployment and output. 
B) inflation and output. 
C) unemployment and inflation. 
D) imports and exports. 
E) unemployment and imports.

Question 13

If the economy is in recession, explain what advice you would give the President, if you were a monetarist economist. What if you were a Keynesian?

Accepted Answer

If you were a monetarist, you would tell

Question 14

According to the adaptive expectations theory, people form their expectations of the future on the basis of recent experiences.

Accepted Answer

A) True 
 B)False

Question 15

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase:

Accepted Answer

A) prices but not real output in the short run. 
B) real output but not prices in the short run. 
C) real output in the long run but not in the short run. 
D) real output in both the long run and the short run. 
A) prices but not real output in the short run. 
B) real output but not prices in the short run. 
C) real output in the long run but not in the short run. 
D) real output in both the long run and the short run.

Question 16

Exhibit 17-2 Aggregate demand and aggregate supply curves   As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause the economy to move:

Accepted Answer

A) directly from E1 to E3 and then remain at E3. 
B) directly from E1 to E2 and then remain at E2. 
C) from E1 to E2 initially and then eventually move back to E1. 
D) from E1 to E2 initially and then eventually move to E3. 
A) directly from E1 to E3 and then remain at E3. 
B) directly from E1 to E2 and then remain at E2. 
C) from E1 to E2 initially and then eventually move back to E1. 
D) from E1 to E2 initially and then eventually move to E3.

Question 17

Each point on the Phillips curve represents a combination of the:

Accepted Answer

A) consumption rate and the unemployment rate. 
B) savings rate and the inflation rate. 
C) interest rate and the savings rate. 
D) inflation rate and the unemployment rate. 
A) consumption rate and the unemployment rate. 
B) savings rate and the inflation rate. 
C) interest rate and the savings rate. 
D) inflation rate and the unemployment rate.

Question 18

The natural rate hypothesis argues that the economy will:

Accepted Answer

A) self-correct to the natural rate of inflation. 
B) require expansionary fiscal policy to reach the natural rate of unemployment. 
C) self-correct to the natural rate of unemployment. 
D) require expansionary monetary policy to reach the natural rate of unemployment. 
A) self-correct to the natural rate of inflation. 
B) require expansionary fiscal policy to reach the natural rate of unemployment. 
C) self-correct to the natural rate of unemployment. 
D) require expansionary monetary policy to reach the natural rate of unemployment.

Question 19

According to rational expectations theory,

Accepted Answer

A) there is absolutely nothing government can do, even in the short run, to reduce the economy's unemployment rate. 
B) the government can use fiscal policy such as increased government spending or lower tax rates to reduce unemployment. 
C) a modern extension of Keynesian economics exists. 
D) discretionary fiscal policy is essential for prolonged growth. 
E) market participants can be fooled in the long run by monetary and fiscal policy rules. 
A) there is absolutely nothing government can do, even in the short run, to reduce the economy's unemployment rate. 
B) the government can use fiscal policy such as increased government spending or lower tax rates to reduce unemployment. 
C) a modern extension of Keynesian economics exists. 
D) discretionary fiscal policy is essential for prolonged growth. 
E) market participants can be fooled in the long run by monetary and fiscal policy rules.

Question 20

Wage and price controls imposed for an extended period of time are likely to result in:

Accepted Answer

A) shortages. 
B) rationing. 
C) black markets. 
D) All of these. 
A) shortages. 
B) rationing. 
C) black markets. 
D) All of these.

Exam 17: The Phillips Curve and Expectations Theory

According to adaptive expectations theory, expansionary monetary and fiscal policies to reduce the unemployment rate are:

Many economists argue that, in the long run, the economy self-corrects and achieves full employment. This argument is known as the:

The long-run Phillips curve is a(n)____ line at the natural rate of unemployment.

The "WIN" button approach to breaking a wage-price spiral was proposed by President Ford to a joint session of Congress.

The hypothesis that people believe the best indicator of the future is the recent past is known as:

The hypothesis that people use all available information to predict the future is known as:

U.S. macroeconomic data show that a stable Phillips curve existed during the 1960s.

According to the adaptive expectations theory, people form their expectations of the future on the basis of future expectations.

The relationship between inflation and unemployment shown along a Phillips curve is a(n):

Incomes policies reject wage-price controls and guidelines.

Most economists agree that the government should use incomes policies to control inflation during peacetime.

The Phillips Curve shows the trade-off between:

If the economy is in recession, explain what advice you would give the President, if you were a monetarist economist. What if you were a Keynesian?

According to the adaptive expectations theory, people form their expectations of the future on the basis of recent experiences.

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase:

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause the economy to move:

Each point on the Phillips curve represents a combination of the:

The natural rate hypothesis argues that the economy will:

According to rational expectations theory,

Wage and price controls imposed for an extended period of time are likely to result in:

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Gross Domestic Product

Business Cycles and Unemployment

Inflation

The Keynesian Model

The Keynesian Model in Action

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

Monetary Policy

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Applying Graphs to Economics

Consumer Surplus, Producer Surplus, and Market Efficiency

the Self-Correcting Aggregate Demand and Supply Model

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Filters

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the economy to move: