Exam 16: Expectations Theory and the Economy

According to new classical economists,when monetary and fiscal policies are __________ anticipated,people form their expectations __________,and wages and prices are __________,the policy ineffectiveness proposition (PIP)results.

A person's real wage will fall if the

The original (1958)Phillips curve stated that

Exhibit 16-5 -Refer to Exhibit 16-5.If the economy is at point 6,and the natural unemployment rate exists at points 1,4,and 5,it follows that

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

In which of the following economic theories is it possible for an increase in the money supply to lead to a decrease in Real GDP in the short run?

According to the original Phillips curve,the cost of reducing the unemployment rate in the short run is a

New classical economists build their theories upon

Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts at point B.Fed monetary policy shifts the AD curve to AD₁.A recession is likely if the economy operates under __________ assumptions,which include wage and price __________.

Events of the 1970s and early 1980s showed that

Suppose that in a new classical model the public anticipates that policymakers will increase aggregate demand.However,aggregate demand increases by less than what the public anticipated.The result in the short run is that Real GDP ____________ and the price level ____________.

Exhibit 16-4 -Refer to Exhibit 16-4.If LRAS₁ shifts to LRAS₂,and this causes AD₁ to shift to AD₂,economists would call this a

Milton Friedman argued that the economy is not in long-run equilibrium if the expected inflation rate __________ the actual inflation rate.

Implied in new Keynesian theory is that when policy is correctly anticipated,there is a tradeoff between inflation and unemployment in

Exhibit 16-4 -Two key assumptions of new Keynesian theory include:

Milton Friedman argued that as long as

As the price level falls,real wage ____________and people choose to work ___________.

Exhibit 16-5 -Refer to Exhibit 16-5.If the economy continually moves between points 1,2,and 3,it follows that

Suppose that the government implements expansionary fiscal policy that raises aggregate demand,but individuals incorrectly anticipate the policy measure (bias upward).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 _____________.

An unanticipated decrease in aggregate demand will cause an upward shift in the short-run Phillips curve.