Exam 16: Expectations Theory and the Economy

Exhibit 16-4 -The economy is initially in long-run equilibrium.Expectations are adaptive,prices and wages are flexible,and there is an unanticipated increase in aggregate demand.In the short run,the price level will be __________ than it was in long-run equilibrium and Real GDP will be __________ than it was in long-run equilibrium.

Suppose that the Fed implements expansionary monetary policy that raises aggregate demand,but individuals incorrectly anticipate the policy measure (bias downward).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 ____________.

Stagflation implies that

New Keynesian theorists argue that

The original Phillips curve suggests a(n)__________ relationship between the rate of change in __________ and the __________.

New classical economists believe that if policy is correctly anticipated and if rational expectations hold,when the Fed increases the money supply the result will be a(n)______________ in the price level and ____________________________.

Exhibit 16-4 -Refer to Exhibit 16-4.The economy is initially at point A,in long run equilibrium.A real business cycle would be represented by the following sequence of curve shifts:

Real business cycle theory would emphasize the ability of a beneficial supply shock to shift the __________ curve rightward and __________ Real GDP.

Rational expectations theory is also known as the Friedman fooling theory.

The economy was in long-run equilibrium when aggregate demand increased.At this point in time,the expected inflation has started to adjust to the new higher actual inflation rate.According to the (Friedman)natural rate theory,this means the unemployment rate in the economy must currently be

Exhibit 16-8 -Refer to Exhibit 16-8.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?

In the 1970s and early 1980s,the U.S.economy experienced

Suppose that the Fed expects to increase the money supply by $49 billion,but economic agents expect that the increase will be closer to $75 billion.Using rational expectations theory,the result will be ______________ Real GDP and a ________________ price level.

According to real business cycle theorists,if the long-run aggregate supply (LRAS)curve shifts to the left,Real GDP __________,the price level __________,the demand for labor __________,money wages __________,real wages __________,and workers choose to work __________.

If expectations are formed rationally,wages and prices are not completely flexible in the short run,and policy is correctly anticipated,increases in aggregate demand will stimulate the economy to higher levels of Real GDP and lower levels of unemployment in

The Samuelson-Solow version of the Phillips curve states that

Expectations theory tells us that what people think can impact the economy.

For the period 1961 to 1969,the Phillips curve for the United States displayed the same shape that A.W.Phillips found for the United Kingdom for the period 1861 to 1913---it was

Starting from long-run equilibrium,if the public anticipates that policymakers will increase aggregate demand by less than policymakers do increase aggregate demand,and if the short-run aggregate supply curve fully adjusts to the (incorrectly)anticipated increase in aggregate demand,then Real GDP will __________ and the price level will __________.

Exhibit 16-10 -Refer to Exhibit 16-10.Assume that the starting point is point 1.Suppose that the government implements expansionary fiscal policy that raises aggregate demand.Which of the following best goes with the diagram shown?