Question 1

The Phillips curve:

Accepted Answer

A) was relatively well-defined during the 1960s. 
B) demonstrates how to achieve stable economic growth. 
C) shows the trade-off between deficits and inflation. 
D) helps to stimulate entrepreneurial profits. 
E) becomes vertical at full employment. 
A) was relatively well-defined during the 1960s. 
B) demonstrates how to achieve stable economic growth. 
C) shows the trade-off between deficits and inflation. 
D) helps to stimulate entrepreneurial profits. 
E) becomes vertical at full employment.

Question 2

The modern view of the Phillips curve suggests that:

Accepted Answer

A) when inflation is reduced, unemployment will fall below the natural rate. 
B) the Phillips curve is an unstable relationship. 
C) systematic demand stimulus policies will be unable to affect prices in the long run. 
D) there will be a trade-off between inflation and unemployment in the long run. 
A) when inflation is reduced, unemployment will fall below the natural rate. 
B) the Phillips curve is an unstable relationship. 
C) systematic demand stimulus policies will be unable to affect prices in the long run. 
D) there will be a trade-off between inflation and unemployment in the long run.

Question 3

According to adaptive expectations theory, which of the following would be the result of expansionary monetary and fiscal policies?

Accepted Answer

A) There is a short-run reduction in unemployment. 
B) There is a long-run trade off between inflation and unemployment. 
C) The inflation rate falls in the long run. 
D) The economy always operates at the natural rate of unemployment 
A) There is a short-run reduction in unemployment. 
B) There is a long-run trade off between inflation and unemployment. 
C) The inflation rate falls in the long run. 
D) The economy always operates at the natural rate of unemployment

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

According to rational expectations theory, which of the following is the best approach to lower the inflation rate?

Accepted Answer

A) Preannounced stable government policies. 
B) Unpredictable government policies. 
C) First predictable and then unpredictable government policies. 
D) None of these. 
A) Preannounced stable government policies. 
B) Unpredictable government policies. 
C) First predictable and then unpredictable government policies. 
D) None of these.

Question 6

The natural rate hypothesis implies that the long-run Phillips curve will be:

Accepted Answer

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

Question 7

Exhibit 17-2 Aggregate demand and aggregate supply curves   As shown in Exhibit 17-2, if people behave according to rational 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 8

Under adaptive expectations theory, a decrease in the short-run aggregate demand curve ____ the inflation rate and ____ the unemployment rate.

Accepted Answer

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

Question 9

Exhibit 17-1 Inflation and unemployment rates   The graph in Exhibit 17-1 indicates a(n):

Accepted Answer

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

Question 10

The view that decision-maker expectations are based on actual outcomes observed during the recent past is called the:

Accepted Answer

A) rational expectations hypothesis. 
B) adaptive expectations hypothesis. 
C) permanent income theory. 
D) recognition lag. 
A) rational expectations hypothesis. 
B) adaptive expectations hypothesis. 
C) permanent income theory. 
D) recognition lag.

Question 11

The long-run Phillips curve:

Accepted Answer

A) is downward sloping. 
B) is upward sloping. 
C) shows there is no tradeoff between unemployment and inflation. 
D) is horizontal at the natural rate of inflation. 
A) is downward sloping. 
B) is upward sloping. 
C) shows there is no tradeoff between unemployment and inflation. 
D) is horizontal at the natural rate of inflation.

Question 12

If people behave according to rational expectations theory, people would expect the rate of inflation this year to be:

Accepted Answer

A) the same as last year. 
B) zero, regardless of the rate last year. 
C) the rate based on predictable monetary and fiscal policies. 
D) All of these. 
A) the same as last year. 
B) zero, regardless of the rate last year. 
C) the rate based on predictable monetary and fiscal policies. 
D) All of these.

Question 13

Which of the following groups believes that government policy is undermined by people's incorporation of the anticipated consequences of the policy into their present decisions?

Accepted Answer

A) Classical school. 
B) Keynesian school. 
C) Neo-Keynesian school. 
D) Rational expectations school. 
E) Supply-side school. 
A) Classical school. 
B) Keynesian school. 
C) Neo-Keynesian school. 
D) Rational expectations school. 
E) Supply-side school.

Question 14

According to rational expectations theory, what information do businesses and workers use when they form their expectations regarding inflation?

Accepted Answer

A) Recent events and data. 
B) Keynesian and monetarist models. 
C) Forecasts by public-and private-sector economists. 
D) All the relevant information that is available. 
A) Recent events and data. 
B) Keynesian and monetarist models. 
C) Forecasts by public-and private-sector economists. 
D) All the relevant information that is available.

Question 15

Which of the following statements is true ?

Accepted Answer

A) The Phillips curve has always been stable. 
B) If the Phillips curve shifts outward to the right this illustrates a greater tradeoff between unemployment and inflation. 
C) Keynesian economics assumes a vertical Phillips curve. 
D) According to the natural rate hypothesis the Phillips curve is downward sloping. 
E) All of these. 
A) The Phillips curve has always been stable. 
B) If the Phillips curve shifts outward to the right this illustrates a greater tradeoff between unemployment and inflation. 
C) Keynesian economics assumes a vertical Phillips curve. 
D) According to the natural rate hypothesis the Phillips curve is downward sloping. 
E) All of these.

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:

Accepted Answer

A) labor to adjust nominal wages sluggishly. 
B) the aggregate supply curve to shift from SRAS1 to SRAS2 
C) the price level to eventually rise from 100 to 110. 
D) All of these. 
A) labor to adjust nominal wages sluggishly. 
B) the aggregate supply curve to shift from SRAS1 to SRAS2 
C) the price level to eventually rise from 100 to 110. 
D) All of these.

Question 17

If the long-run Phillips curve is vertical, then any government policy designed to lower:

Accepted Answer

A) unemployment will not change the unemployment rate and only increase the inflation rate. 
B) unemployment will work leaving the inflation rate unchanged. 
C) inflation will cause employment to rise. 
D) unemployment will work causing the inflation rate to fall. 
E) unemployment will work causing inflation to rise. 
A) unemployment will not change the unemployment rate and only increase the inflation rate. 
B) unemployment will work leaving the inflation rate unchanged. 
C) inflation will cause employment to rise. 
D) unemployment will work causing the inflation rate to fall. 
E) unemployment will work causing inflation to rise.

Question 18

Under adaptive expectations theory, people persistently:

Accepted Answer

A) underestimate inflation when it is slowing down. 
B) overestimate inflation when it is accelerating. 
C) underestimate inflation when it is accelerating. 
D) adapt to the prevailing inflation rate. 
A) underestimate inflation when it is slowing down. 
B) overestimate inflation when it is accelerating. 
C) underestimate inflation when it is accelerating. 
D) adapt to the prevailing inflation rate.

Question 19

The rational expectations theory indicates that expansionary policy will:

Accepted Answer

A) stimulate real output in the long run but not in the short run. 
B) expand real output and employment if the public quickly anticipates the effects of the expansionary policy. 
C) equalize real and nominal interest rates during lengthy periods of inflation. 
D) fail to increase employment because individuals will anticipate it and take actions that will offset its impact. 
A) stimulate real output in the long run but not in the short run. 
B) expand real output and employment if the public quickly anticipates the effects of the expansionary policy. 
C) equalize real and nominal interest rates during lengthy periods of inflation. 
D) fail to increase employment because individuals will anticipate it and take actions that will offset its impact.

Question 20

Exhibit 17-5 Short-run and long-run Phillips curve   Suppose the government shown in Exhibit 17-5 uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have adaptive expectations, then:

Accepted Answer

A) the economy will remain stuck at point E1. 
B) the natural rate will permanently increase to 8 percent. 
C) unemployment will rise to 8 percent in the short run. 
D) unemployment will remain at 6 percent as the inflation rate falls. 
A) the economy will remain stuck at point E1. 
B) the natural rate will permanently increase to 8 percent. 
C) unemployment will rise to 8 percent in the short run. 
D) unemployment will remain at 6 percent as the inflation rate falls.

Exam 17: The Phillips Curve and Expectations Theory

The Phillips curve:

The modern view of the Phillips curve suggests that:

According to adaptive expectations theory, which of the following would be the result of expansionary monetary and fiscal policies?

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

According to rational expectations theory, which of the following is the best approach to lower the inflation rate?

The natural rate hypothesis implies that the long-run Phillips curve will be:

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

Under adaptive expectations theory, a decrease in the short-run aggregate demand curve ____ the inflation rate and ____ the unemployment rate.

Exhibit 17-1 Inflation and unemployment rates The graph in Exhibit 17-1 indicates a(n):

The view that decision-maker expectations are based on actual outcomes observed during the recent past is called the:

The long-run Phillips curve:

If people behave according to rational expectations theory, people would expect the rate of inflation this year to be:

Which of the following groups believes that government policy is undermined by people's incorporation of the anticipated consequences of the policy into their present decisions?

According to rational expectations theory, what information do businesses and workers use when they form their expectations regarding inflation?

Which of the following statements is true ?

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:

If the long-run Phillips curve is vertical, then any government policy designed to lower:

Under adaptive expectations theory, people persistently:

The rational expectations theory indicates that expansionary policy will:

Exhibit 17-5 Short-run and long-run Phillips curve Suppose the government shown in Exhibit 17-5 uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have adaptive expectations, then:

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 rational expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the economy to move:

Under adaptive expectations theory, a decrease in the short-run aggregate demand curve the inflation rate and the unemployment rate.

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: