Exam 16: Expectations Theory and the Economy

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

Exhibit 16-7 -Refer to Exhibit 16-7.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?

If expectations are formed rationally,wages and prices are completely flexible in the short run and policy is correctly anticipated,increases in aggregate demand will

The difference between the new classical theory and the new Keynesian theory is the assumption of

Real business cycle theory emphasizes that an adverse supply shock will shift the LRAS curve leftward and cause a decline in Real GDP.

Exhibit 16-4 -One implication of the policy ineffectiveness proposition (PIP)is that expansionary __________ policy is not effective at raising __________.

Exhibit 16-11 -Refer to Exhibit 16-11.Assume that the starting point is point 1.Suppose that there is a supply-side change capable of reducing the capacity of the economy to produce.Which of the following best goes with the diagram shown?

Rational expectations are based on the past alone,while adaptive expectations are based on the past,the present,and the future.

Suppose that the government implements expansionary fiscal policy that raises aggregate demand,but the policy is unanticipated.According to new classical theory,in the short run the price level would ____________ and Real GDP would ______________.In the long run,new classical theory would predict that the price level would ______________ compared to its original long-run equilibrium level and that Real GDP would ____________.

The expected inflation rate is equal to the actual inflation rate.According to the (Friedman)natural rate theory,the economy is

Describe the policy ineffectiveness proposition (PIP).Be sure to state which economic theory the PIP is associated with and the assumptions that are necessary for this argument to hold.

Which of the following assumptions is held by both the classical view and the new classical view?

Stagflation consists of

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.In new Keynesian theory,the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

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

In what ways does the original Phillips curve differ from the Phillips curve created by economists Samuelson and Solow? What conclusions did economists draw based on the findings of Phillips,Samuelson and Solow?

Under new Keynesian theory,a correctly anticipated decrease in aggregate demand will lead to __________ in Real GDP and __________ in the price level.

Exhibit 16-4 -The economist who won the Nobel Prize in Economics in 1995,and whose name is closely connected with rational expectations theory,is

New classical economists believe that monetary and fiscal policies are never effective.

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.