Question 1

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 2

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)  always higher than last year. 
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)  always higher than last year.

Question 3

In the United States, the most recent use of wage and price controls occurred during the:

Accepted Answer

A)  Nixon administration. 
B)  Carter administration. 
C)  Reagan administration. 
D)  Clinton administration. 
A)  Nixon administration. 
B)  Carter administration. 
C)  Reagan administration. 
D)  Clinton administration.

Question 4

The proponents of rational expectations believe that:

Accepted Answer

A)  there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy. 
B)  macro-policies that stimulate demand and place upward pressure on the general level if prices will temporarily increase output and employment. 
C)  the inflationary side effects of expansionary policies will be anticipated quickly, and therefore, even their short-run effects on real output and employment will be minimal. 
D)  discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy. 
A)  there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy. 
B)  macro-policies that stimulate demand and place upward pressure on the general level if prices will temporarily increase output and employment. 
C)  the inflationary side effects of expansionary policies will be anticipated quickly, and therefore, even their short-run effects on real output and employment will be minimal. 
D)  discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.

Question 5

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

Accepted Answer

A)  to point A in the short run and point B in the long run. 
B)  directly to point B. 
C)  to point C in the short run and point D in the long run. 
D)  directly to point D. 
A)  to point A in the short run and point B in the long run. 
B)  directly to point B. 
C)  to point C in the short run and point D in the long run. 
D)  directly to point D.

Question 6

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 7

The view that individuals weigh all available evidence when they formulate their expectations about economic events (including information concerning the probable effects of current and future economic policy) is called:

Accepted Answer

A)  the adaptive expectations hypothesis. 
B)  the permanent income hypothesis. 
C)  the rational expectations hypothesis. 
D)  the Phillips curve. 
A)  the adaptive expectations hypothesis. 
B)  the permanent income hypothesis. 
C)  the rational expectations hypothesis. 
D)  the Phillips curve.

Question 8

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 9

Under adaptive expectations theory, people expect the rate of inflation this year to be:

Accepted Answer

A)  zero, regardless of the rate last year. 
B)  the same as last year. 
C)  the rate based on predictable and fiscal policies. 
D)  always higher than last year. 
A)  zero, regardless of the rate last year. 
B)  the same as last year. 
C)  the rate based on predictable and fiscal policies. 
D)  always higher than last year.

Question 10

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:

Accepted Answer

A)  labor to adjust nominal wages sluggishly. 
B)  the aggregate supply curve to remain at SRAS1. 
C)  the price level to eventually rise from 100 to 110. 
D)  the price level to rise directly from 100 to 110 and GDP to remain constant at $6 trillion. 
A)  labor to adjust nominal wages sluggishly. 
B)  the aggregate supply curve to remain at SRAS1. 
C)  the price level to eventually rise from 100 to 110. 
D)  the price level to rise directly from 100 to 110 and GDP to remain constant at $6 trillion.

Question 11

Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more expansionary monetary policy?

Accepted Answer

A)  In the short run, the real rate of output will be unaffected, but in the long run, it will increase. 
B)  In the short run, the unemployment rate will decrease, but in the long run, it will self correct to the natural rate of unemployment. 
C)  There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher. 
D)  In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase. 
A)  In the short run, the real rate of output will be unaffected, but in the long run, it will increase. 
B)  In the short run, the unemployment rate will decrease, but in the long run, it will self correct to the natural rate of unemployment. 
C)  There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher. 
D)  In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase.

Question 12

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)  successful at achieving the desired outcomes. 
A)  useless in the long run. 
B)  useless in the short run. 
C)  ineffective on the price level. 
D)  successful at achieving the desired outcomes.

Question 13

Most economists consider the case for jawboning to control inflation is strongest when this policy is used:

Accepted Answer

A)  for an extended period of time. 
B)  in combination with a credible threat against a firm's profits. 
C)  by a president who has no credible threat against a firm's profits. 
D)  to increase the minimum wage. 
A)  for an extended period of time. 
B)  in combination with a credible threat against a firm's profits. 
C)  by a president who has no credible threat against a firm's profits. 
D)  to increase the minimum wage.

Question 14

On a Phillips curve diagram, a decrease in the rate of inflation, other things being equal, is represented by a(n):

Accepted Answer

A)  upward movement along the Phillips curve. 
B)  downward movement along the Phillips curve. 
C)  upward shift of the Phillips curve. 
D)  downward shift of the Phillips curve. 
A)  upward movement along the Phillips curve. 
B)  downward movement along the Phillips curve. 
C)  upward shift of the Phillips curve. 
D)  downward shift of the Phillips curve.

Question 15

Which of the following is not an example of an incomes policy?

Accepted Answer

A)  presidential jawboning 
B)  unemployment insurance 
C)  wage and price guidelines 
D)  wage and price controls 
A)  presidential jawboning 
B)  unemployment insurance 
C)  wage and price guidelines 
D)  wage and price controls

Question 16

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.

Question 17

Suppose that the economy experiences an increase in the inflation rate at the same time that the unemployment rate decreases. This situation indicates a:

Accepted Answer

A)  shift in the Phillips curve. 
B)  movement along a vertical Phillips curve. 
C)  movement along a negatively-sloped Phillips curve. 
D)  movement along a positively-sloped Phillips curve. 
A)  shift in the Phillips curve. 
B)  movement along a vertical Phillips curve. 
C)  movement along a negatively-sloped Phillips curve. 
D)  movement along a positively-sloped Phillips curve.

Question 18

Which of the following correctly describes the Phillips curve?   ​

Accepted Answer

A)  ​A curve showing the inverse relationship between interest rates and the quantity of money demanded. 
B)  ​A curve showing the direct relationship between interest rates and the quantity of money demanded. 
C)  ​A curve showing the direct relationship between the inflation rate and the unemployment rate. 
D)  ​A curve showing the inverse relationship between the inflation rate and the unemployment rate. 
A)  ​A curve showing the inverse relationship between interest rates and the quantity of money demanded. 
B)  ​A curve showing the direct relationship between interest rates and the quantity of money demanded. 
C)  ​A curve showing the direct relationship between the inflation rate and the unemployment rate. 
D)  ​A curve showing the inverse relationship between the inflation rate and the unemployment rate.

Question 19

Under adaptive expectations, the short-term effect of an unanticipated shift to a more expansionary macroeconomic policy will be a:

Accepted Answer

A)  temporary reduction in the unemployment rate. 
B)  permanent reduction in the unemployment rate. 
C)  temporary reduction in the inflation rate. 
D)  permanent reduction in the inflation rate. 
A)  temporary reduction in the unemployment rate. 
B)  permanent reduction in the unemployment rate. 
C)  temporary reduction in the inflation rate. 
D)  permanent reduction in the inflation rate.

Question 20

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.

Exam 27: The Phillips Curve and Expectations Theory

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?

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

In the United States, the most recent use of wage and price controls occurred during the:

The proponents of rational expectations believe that:

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

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

The view that individuals weigh all available evidence when they formulate their expectations about economic events (including information concerning the probable effects of current and future economic policy) is called:

The long-run Phillips curve:

Under adaptive expectations theory, people expect the rate of inflation this year to 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:

Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more expansionary monetary policy?

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

Most economists consider the case for jawboning to control inflation is strongest when this policy is used:

On a Phillips curve diagram, a decrease in the rate of inflation, other things being equal, is represented by a(n):

Which of the following is not an example of an incomes policy?

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:

Suppose that the economy experiences an increase in the inflation rate at the same time that the unemployment rate decreases. This situation indicates a:

Which of the following correctly describes the Phillips curve? ​

Under adaptive expectations, the short-term effect of an unanticipated shift to a more expansionary macroeconomic policy will be a:

The natural rate hypothesis argues that the economy will:

Introducing the Economic Way of Thinking

Production Possibilities Opportunity Cost and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand and Supply

Consumer Choice Theory

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets

Income Distribution Poverty and Discrimination

Antitrust and Regulation

Environmental Economics

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

Understanding Direct and Inverse Relationships between Variables

Filters

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

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:

Which of the following correctly describes the Phillips curve?