Exam 27: The Phillips Curve and Expectations Theory

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Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?

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A

Exhibit 17-3 Aggregate demand and aggregate supply curves Exhibit 17-3 Aggregate demand and aggregate supply curves   As shown in Exhibit 17-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD<sub>1</sub> to AD<sub>2</sub> will cause the economy to move: As shown in Exhibit 17-3, 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:

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D

Exhibit 17-1 Inflation and unemployment rates Exhibit 17-1 Inflation and unemployment rates   In Exhibit 17-1, when the unemployment rate goes from 9 percent to 1.5 percent, the: In Exhibit 17-1, when the unemployment rate goes from 9 percent to 1.5 percent, the:

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B

Which of the following models emphasizes the importance of credible, predictable government policies for maintaining full employment with low inflation?

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

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Exhibit 17-4 Short-run and long-run Phillips curves Exhibit 17-4 Short-run and long-run Phillips curves   Suppose the economy in Exhibit 17-4 is at point E<sub>1</sub>, and the Fed increases the money supply. If people have rational expectations, then the economy will move: Suppose the economy in Exhibit 17-4 is at point E1, and the Fed increases the money supply. If people have rational expectations, then the economy will move:

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

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

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Exhibit 17-2 Aggregate demand and aggregate supply curves 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 AD<sub>1</sub> to AD<sub>2</sub> will cause the economy to move: 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:

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The modern view of the Phillips curve suggests that:

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The rational expectations theory indicates that expansionary policy will:

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The political business cycle refers to the possibility that:

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Exhibit 17-3 Aggregate demand and aggregate supply curves Exhibit 17-3 Aggregate demand and aggregate supply curves   As shown in Exhibit 17-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD<sub>1</sub> to AD<sub>2</sub> will cause the price level to move: As shown in Exhibit 17-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause the price level to move:

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

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Exhibit 17-2 Aggregate demand and aggregate supply curves 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 AD<sub>1</sub> to AD<sub>2</sub> will cause the price level to move: 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 price level to move:

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

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Experience with the Phillips curve since the 1970s has shown that the:

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Which of the following best describes the idea of a political business cycle?

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Explain why rational expectations theorists do not support government intervention to alleviate unemployment. Explain their views on the effectiveness of fiscal policy and monetary policy.

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The Phillips curve illustrates the relationship between:

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