Question 1

According to a new Keynesian theorist,a correctly anticipated increase in aggregate demand will

Accepted Answer

A) cause the price level to increase by a greater amount in the short run than what a new classical rational expectations theorist would predict. 
B) cause the price level to increase by a smaller amount in the short run than what a new classical rational expectations theorist would predict. 
C) cause the price level to increase by the same amount in the short run that a new classical rational expectations theorist would predict. 
D) leave the price level unchanged in the short run,but Real GDP will increase more than what a new classical theorist would predict. 
E) leave the price level unchanged in the short run,but Real GDP will increase less than what a new classical theorist would predict. 
A) cause the price level to increase by a greater amount in the short run than what a new classical rational expectations theorist would predict. 
B) cause the price level to increase by a smaller amount in the short run than what a new classical rational expectations theorist would predict. 
C) cause the price level to increase by the same amount in the short run that a new classical rational expectations theorist would predict. 
D) leave the price level unchanged in the short run,but Real GDP will increase more than what a new classical theorist would predict. 
E) leave the price level unchanged in the short run,but Real GDP will increase less than what a new classical theorist would predict.

Question 2

According to new classical theory,if the public correctly anticipates a government policy to increase aggregate demand,then the

Accepted Answer

A) short-run Phillips curve will be upward sloping,but the long-run Phillips curve will be downward-sloping. 
B) long-run Phillips curve will be upward sloping,but the short-run Phillips curve will be downward-sloping. 
C) short-run Phillips curve will be upward sloping,but the long-run Phillips curve will be vertical. 
D) long run Phillips curve will be upward sloping,but the short-run Phillips curve will be vertical. 
E) short- and long-run Phillips curves will be vertical. 
A) short-run Phillips curve will be upward sloping,but the long-run Phillips curve will be downward-sloping. 
B) long-run Phillips curve will be upward sloping,but the short-run Phillips curve will be downward-sloping. 
C) short-run Phillips curve will be upward sloping,but the long-run Phillips curve will be vertical. 
D) long run Phillips curve will be upward sloping,but the short-run Phillips curve will be vertical. 
E) short- and long-run Phillips curves will be vertical.

Question 3

According to Friedman,in which of the following situations is the economy in long-run equilibrium?

Accepted Answer

A) The average inflation rate over the past five years is 2 percent and the expected inflation rate is 2 percent. 
B) The expected economic growth rate is 3 percent and the actual inflation rate is 3 percent. 
C) The expected economic growth rate is 2 percent and the expected inflation rate is 2 percent. 
D) The expected inflation rate is 3 percent and the actual inflation rate is 3 percent. 
A) The average inflation rate over the past five years is 2 percent and the expected inflation rate is 2 percent. 
B) The expected economic growth rate is 3 percent and the actual inflation rate is 3 percent. 
C) The expected economic growth rate is 2 percent and the expected inflation rate is 2 percent. 
D) The expected inflation rate is 3 percent and the actual inflation rate is 3 percent.

Question 4

Exhibit 16-1  
-Refer to Exhibit 16-1.Milton Friedman would most likely have called the vertical line on which points A and C are located the

Accepted Answer

A) long-run aggregate supply curve. 
B) Friedman curve. 
C) long-run Phillips curve. 
D) short-run aggregate supply curve. 
E) short-run Phillips curve. 
A) long-run aggregate supply curve. 
B) Friedman curve. 
C) long-run Phillips curve. 
D) short-run aggregate supply curve. 
E) short-run Phillips curve.

Question 5

The Friedman natural rate theory is built upon

Accepted Answer

A) rational expectations. 
B) adaptive expectations. 
C) flexible wages and prices. 
D) the assumption of one Phillips curve. 
E) b and c 
A) rational expectations. 
B) adaptive expectations. 
C) flexible wages and prices. 
D) the assumption of one Phillips curve. 
E) b and c

Question 6

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.According to new classical theory,the price level will __________ and Real GDP will __________.

Accepted Answer

A) fall;rise 
B) rise;fall 
C) fall;remain unchanged 
D) rise;remain unchanged 
E) remain unchanged;remain unchanged 
A) fall;rise 
B) rise;fall 
C) fall;remain unchanged 
D) rise;remain unchanged 
E) remain unchanged;remain unchanged

Question 7

Exhibit 16-9  
-Refer to Exhibit 16-9.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?

Accepted Answer

A) New classical theory with policy incorrectly anticipated,bias downward 
B) New classical theory with policy incorrectly anticipated,bias upward 
C) Real business cycle theory 
D) New classical theory with policy unanticipated 
E) Policy ineffectiveness proposition (PIP) 
A) New classical theory with policy incorrectly anticipated,bias downward 
B) New classical theory with policy incorrectly anticipated,bias upward 
C) Real business cycle theory 
D) New classical theory with policy unanticipated 
E) Policy ineffectiveness proposition (PIP)

Question 8

One of the arguments supporting new classical theory is the policy ineffectiveness proposition (PIP).

Accepted Answer

A) True 
 B)False

Question 9

According to rational expectations theory,

Accepted Answer

A) every day is a new day and yesterday's occurrences have no bearing on today's decisions. 
B) when making decisions a person will consider only information based on past experience. 
C) even though a person considers information related to future events as potentially important for decision making,he realizes that such information is unreliable and worthless. 
D) past experience is a good guide for decision making,but so is information related to possible future outcomes. 
A) every day is a new day and yesterday's occurrences have no bearing on today's decisions. 
B) when making decisions a person will consider only information based on past experience. 
C) even though a person considers information related to future events as potentially important for decision making,he realizes that such information is unreliable and worthless. 
D) past experience is a good guide for decision making,but so is information related to possible future outcomes.

Question 10

The terms rational expectations and adaptive expectations are two different names for the same concept.

Accepted Answer

A) True 
 B)False

Question 11

The Samuelson and Solow Phillips curve suggested a(n)__________ relationship between the rate of change in __________ and the unemployment rate.

Accepted Answer

A) direct;real wage rates 
B) inverse;money wage rates 
C) inverse;prices 
D) direct;prices 
E) none of the above 
A) direct;real wage rates 
B) inverse;money wage rates 
C) inverse;prices 
D) direct;prices 
E) none of the above

Question 12

The economy is in long-run equilibrium when there is an incorrectly anticipated increase in aggregate demand brought about by expansionary monetary policy.Specifically,aggregate demand increases by less than people anticipate (bias upward).According to new classical theory,the price level will __________ and Real GDP will __________ in the short run.In the long run,the price level will be __________ than it was before aggregate demand increased.

Accepted Answer

A) rise;rise;lower 
B) rise;fall;higher. 
C) rise;fall;higher 
D) fall;rise;lower 
E) rise;rise;higher 
A) rise;rise;lower 
B) rise;fall;higher. 
C) rise;fall;higher 
D) fall;rise;lower 
E) rise;rise;higher

Question 13

According to new classical theory,if policy is correctly anticipated,expectations are formed rationally,and wages and prices are fully flexible,then an increase in aggregate demand will change Real GDP,but not the price level.

Accepted Answer

A) True 
 B)False

Question 14

The policy ineffectiveness proposition (PIP)argument states that under certain circumstances,neither expansionary demand-side fiscal policy nor expansionary monetary policy is effective at achieving macroeconomic goals.

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 16-1  
-Refer to Exhibit 16-1.Suppose the economy is currently at point A on the short-run Phillips curve,SRPC1.What could get the economy to move to point B?

Accepted Answer

A) an increase in aggregate demand combined with an unchanged expected inflation rate 
B) an increase in aggregate demand combined with a rise in the expected inflation rate 
C) a rise in the expected inflation rate 
D) a decrease in aggregate demand combined with an unchanged expected inflation rate 
E) none of the above 
A) an increase in aggregate demand combined with an unchanged expected inflation rate 
B) an increase in aggregate demand combined with a rise in the expected inflation rate 
C) a rise in the expected inflation rate 
D) a decrease in aggregate demand combined with an unchanged expected inflation rate 
E) none of the above

Question 16

Stagflation

Accepted Answer

A) is highly unlikely if the Phillips curve is downward sloping. 
B) implies that a tradeoff between inflation and unemployment may not always exist. 
C) is the simultaneous occurrence of high rates of inflation and unemployment. 
D) b and c 
E) a,b,and c 
A) is highly unlikely if the Phillips curve is downward sloping. 
B) implies that a tradeoff between inflation and unemployment may not always exist. 
C) is the simultaneous occurrence of high rates of inflation and unemployment. 
D) b and c 
E) a,b,and c

Question 17

When everyone correctly anticipates that the Fed will buy government securities,then they know that prices will increase.Which of the following adjustments is not likely to occur?

Accepted Answer

A) Workers will negotiate higher wages. 
B) Suppliers of resources will demand higher prices for their resources. 
C) Producers will prevent the price level from increasing and hurting their sales. 
D) Producers will raise prices. 
A) Workers will negotiate higher wages. 
B) Suppliers of resources will demand higher prices for their resources. 
C) Producers will prevent the price level from increasing and hurting their sales. 
D) Producers will raise prices.

Question 18

As long as some people anticipate policy,the economic consequences may be the same as if all persons do so.

Accepted Answer

A) True 
 B)False

Question 19

The original (1958)Phillips curve

Accepted Answer

A) showed that stagflation is inevitable. 
B) showed the tradeoff between the use of monetary and fiscal policy. 
C) has never been used as an important economic policy tool. 
D) suggested a tradeoff between wage inflation and the unemployment rate. 
E) none of the above 
A) showed that stagflation is inevitable. 
B) showed the tradeoff between the use of monetary and fiscal policy. 
C) has never been used as an important economic policy tool. 
D) suggested a tradeoff between wage inflation and the unemployment rate. 
E) none of the above

Question 20

The real business cycle theory holds that the business cycle

Accepted Answer

A) originates as a result of factors affecting aggregate supply. 
B) originates as a result of factors affecting aggregate demand. 
C) is the result of correctly anticipated policies. 
D) is the result of incorrectly anticipated policies. 
A) originates as a result of factors affecting aggregate supply. 
B) originates as a result of factors affecting aggregate demand. 
C) is the result of correctly anticipated policies. 
D) is the result of incorrectly anticipated policies.

Exam 16: Expectations Theory and the Economy

According to a new Keynesian theorist,a correctly anticipated increase in aggregate demand will

According to new classical theory,if the public correctly anticipates a government policy to increase aggregate demand,then the

According to Friedman,in which of the following situations is the economy in long-run equilibrium?

Exhibit 16-1 -Refer to Exhibit 16-1.Milton Friedman would most likely have called the vertical line on which points A and C are located the

The Friedman natural rate theory is built upon

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.According to new classical theory,the price level will __________ and Real GDP will __________.

Exhibit 16-9 -Refer to Exhibit 16-9.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?

One of the arguments supporting new classical theory is the policy ineffectiveness proposition (PIP).

According to rational expectations theory,

The terms rational expectations and adaptive expectations are two different names for the same concept.

The Samuelson and Solow Phillips curve suggested a(n)__________ relationship between the rate of change in __________ and the unemployment rate.

According to new classical theory,if policy is correctly anticipated,expectations are formed rationally,and wages and prices are fully flexible,then an increase in aggregate demand will change Real GDP,but not the price level.

The policy ineffectiveness proposition (PIP)argument states that under certain circumstances,neither expansionary demand-side fiscal policy nor expansionary monetary policy is effective at achieving macroeconomic goals.

Exhibit 16-1 -Refer to Exhibit 16-1.Suppose the economy is currently at point A on the short-run Phillips curve,SRPC1.What could get the economy to move to point B?

Stagflation

When everyone correctly anticipates that the Fed will buy government securities,then they know that prices will increase.Which of the following adjustments is not likely to occur?

As long as some people anticipate policy,the economic consequences may be the same as if all persons do so.

The original (1958)Phillips curve

The real business cycle theory holds that the business cycle

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The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.According to new classical theory,the price level will and Real GDP will .

The Samuelson and Solow Phillips curve suggested a(n) relationship between the rate of change in and the unemployment rate.

Exhibit 16-1 -Refer to Exhibit 16-1.Suppose the economy is currently at point A on the short-run Phillips curve,SRPC₁.What could get the economy to move to point B?