Question 1

The Samuelson-Solow version of the Phillips curve showed the relationship between unemployment rates and

Accepted Answer

A)  Real GDP growth rates. 
B)  price inflation rates. 
C)  wage inflation rates. 
D)  imports. 
A)  Real GDP growth rates. 
B)  price inflation rates. 
C)  wage inflation rates. 
D)  imports.

Question 2

The original (1958)Phillips curve differed from the Samuelson-Solow Phillips curve in that

Accepted Answer

A)  the former was based on American data,while the latter was based on British data. 
B)  the former measured price inflation rates,while the latter used wage inflation rates. 
C)  the former was based on British data,while the latter was based on American data. 
D)  the former measured nominal GDP,while the latter used Real GDP. 
E)  a and b 
A)  the former was based on American data,while the latter was based on British data. 
B)  the former measured price inflation rates,while the latter used wage inflation rates. 
C)  the former was based on British data,while the latter was based on American data. 
D)  the former measured nominal GDP,while the latter used Real GDP. 
E)  a and b

Question 3

Exhibit 16-3  
-Refer to Exhibit 16-3.The economy is at point C.If a decrease in aggregate demand is correctly anticipated in the short run,new classical theory would predict

Accepted Answer

A)  no movement from point C. 
B)  immediate movement to point C'. 
C)  immediate movement to point B. 
D)  immediate movement to point A. 
A)  no movement from point C. 
B)  immediate movement to point C'. 
C)  immediate movement to point B. 
D)  immediate movement to point A.

Question 4

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 5

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

Accepted Answer

A)  AD;lower 
B)  AD;raise 
C)  LRAS;lower 
D)  LRAS;raise 
A)  AD;lower 
B)  AD;raise 
C)  LRAS;lower 
D)  LRAS;raise

Question 6

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

Accepted Answer

A)  cause lower short-run price level increases than a Keynesian would expect. 
B)  cause higher short-run price level increases than a Keynesian would expect. 
C)  not impact the general price level. 
D)  produce both increases and decreases in the price level at different times. 
A)  cause lower short-run price level increases than a Keynesian would expect. 
B)  cause higher short-run price level increases than a Keynesian would expect. 
C)  not impact the general price level. 
D)  produce both increases and decreases in the price level at different times.

Question 7

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 ____________.

Accepted Answer

A)  decreases;decreases 
B)  increases;increases 
C)  increases;decreases 
D)  decreases;increases 
A)  decreases;decreases 
B)  increases;increases 
C)  increases;decreases 
D)  decreases;increases

Question 8

Exhibit 16-1  
-Refer to Exhibit 16-1.According to new classical macroeconomists,if decreases in aggregate demand are unanticipated,then the economy will move from point C to

Accepted Answer

A)  point B. 
B)  point A. 
C)  some point on SRPC2,below C. 
D)  some point on SRPC1,below A. 
A)  point B. 
B)  point A. 
C)  some point on SRPC2,below C. 
D)  some point on SRPC1,below A.

Question 9

Stagflation consists of

Accepted Answer

A)  high inflation and low unemployment. 
B)  low inflation and high unemployment. 
C)  high inflation and high unemployment. 
D)  high unemployment and an economy in a deep recession. 
E)  none of the above 
A)  high inflation and low unemployment. 
B)  low inflation and high unemployment. 
C)  high inflation and high unemployment. 
D)  high unemployment and an economy in a deep recession. 
E)  none of the above

Question 10

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 11

According to the real business cycle theory,business cycle contractions are generally caused by

Accepted Answer

A)  the self-interest of politicians. 
B)  decreases in business investment. 
C)  decreases in the growth rate of the money supply. 
D)  decreases in the economy's capacity to produce. 
E)  all of the above 
A)  the self-interest of politicians. 
B)  decreases in business investment. 
C)  decreases in the growth rate of the money supply. 
D)  decreases in the economy's capacity to produce. 
E)  all of the above

Question 12

Events of the 1970s and early 1980s showed that

Accepted Answer

A)  the Phillips curve presents policymakers with a stable menu of choices. 
B)  cycles of unemployment and inflation rates appear to have gravitated around a 6 percent unemployment rate. 
C)  lower inflation rates are consistently accompanied by higher unemployment rates. 
D)  a tradeoff between inflation and unemployment may not always exist. 
E)  a and c 
A)  the Phillips curve presents policymakers with a stable menu of choices. 
B)  cycles of unemployment and inflation rates appear to have gravitated around a 6 percent unemployment rate. 
C)  lower inflation rates are consistently accompanied by higher unemployment rates. 
D)  a tradeoff between inflation and unemployment may not always exist. 
E)  a and c

Question 13

The original (1958)Phillips curve stated that

Accepted Answer

A)  unemployment and money wage rates move in the same direction. 
B)  unemployment and money wage rates move in opposite directions. 
C)  there is an inverse relationship between price inflation and
Unemployment. 
D)  there is a direct relationship between price inflation and unemployment. 
E)  a and c 
A)  unemployment and money wage rates move in the same direction. 
B)  unemployment and money wage rates move in opposite directions. 
C)  there is an inverse relationship between price inflation and
Unemployment. 
D)  there is a direct relationship between price inflation and unemployment. 
E)  a and c

Question 14

Exhibit 16-2  
-Refer to Exhibit 16-2.Suppose the economy starts out at point A.Next,the public anticipates that the Fed will use expansionary monetary policy to shift the AD curve from AD1 to AD2.What happens,instead,is that the Fed does not raise aggregate demand as much as the public expects (bias upward).Instead the Fed pushes the AD curve from AD1 to AD3.As a result,according to new classical theory in the short run the economy moves to point

Accepted Answer

A)  A. 
B)  B. 
C)  C. 
D)  D. 
A)  A. 
B)  B. 
C)  C. 
D)  D.

Question 15

Although the possibility exists for an economy to experience stagflation,it has never actually happened in the United States.

Accepted Answer

A) True 
 B)False

Question 16

Milton Friedman argued that as long as

Accepted Answer

A)  the unemployment rate is higher than the inflation rate,the economy is not in long-run equilibrium. 
B)  Real GDP grows,the inflation rate will fall. 
C)  the expected inflation rate is not equal to the actual inflation rate,the economy is not in long-run equilibrium. 
D)  nominal wages rise,so do real wages. 
E)  none of the above 
A)  the unemployment rate is higher than the inflation rate,the economy is not in long-run equilibrium. 
B)  Real GDP grows,the inflation rate will fall. 
C)  the expected inflation rate is not equal to the actual inflation rate,the economy is not in long-run equilibrium. 
D)  nominal wages rise,so do real wages. 
E)  none of the above

Question 17

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

Accepted Answer

A)  decreasing. 
B)  increasing. 
C)  higher than it was in long-run equilibrium. 
D)  equal to what it was in long-run equilibrium. 
E)  There is not enough information to answer the question. 
A)  decreasing. 
B)  increasing. 
C)  higher than it was in long-run equilibrium. 
D)  equal to what it was in long-run equilibrium. 
E)  There is not enough information to answer the question.

Question 18

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.

Accepted Answer

A)  lower;higher 
B)  lower;lower 
C)  higher;higher 
D)  higher;lower 
A)  lower;higher 
B)  lower;lower 
C)  higher;higher 
D)  higher;lower

Question 19

The short-run Phillips curve holds that

Accepted Answer

A)  high inflation and high unemployment can occur together. 
B)  low inflation and low unemployment can occur together. 
C)  high inflation and low unemployment can occur together. 
D)  b and c 
A)  high inflation and high unemployment can occur together. 
B)  low inflation and low unemployment can occur together. 
C)  high inflation and low unemployment can occur together. 
D)  b and c

Question 20

Exhibit 16-1  
-Refer to Exhibit 16-1.According to new classical macroeconomists,if increases in aggregate demand are correctly anticipated,then the economy will move from point A to

Accepted Answer

A)  point B. 
B)  point C. 
C)  some point on SRPC2,above C. 
D)  some point on SRPC1,below A. 
A)  point B. 
B)  point C. 
C)  some point on SRPC2,above C. 
D)  some point on SRPC1,below A.

Exam 16: Expectations Theory and the Economy

The Samuelson-Solow version of the Phillips curve showed the relationship between unemployment rates and

The original (1958)Phillips curve differed from the Samuelson-Solow Phillips curve in that

Exhibit 16-3 -Refer to Exhibit 16-3.The economy is at point C.If a decrease in aggregate demand is correctly anticipated in the short run,new classical theory would predict

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.

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

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

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 16-1 -Refer to Exhibit 16-1.According to new classical macroeconomists,if decreases in aggregate demand are unanticipated,then the economy will move from point C to

Stagflation consists of

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

According to the real business cycle theory,business cycle contractions are generally caused by

Events of the 1970s and early 1980s showed that

The original (1958)Phillips curve stated that

Although the possibility exists for an economy to experience stagflation,it has never actually happened in the United States.

Milton Friedman argued that as long as

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

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.

The short-run Phillips curve holds that

Exhibit 16-1 -Refer to Exhibit 16-1.According to new classical macroeconomists,if increases in aggregate demand are correctly anticipated,then the economy will move from point A to

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

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 .

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.