Question 1

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

Accepted Answer

A)  a decrease;a decrease 
B)  no change;an increase 
C)  no change;no change 
D)  an increase;an increase 
E)  an increase;no change 
A)  a decrease;a decrease 
B)  no change;an increase 
C)  no change;no change 
D)  an increase;an increase 
E)  an increase;no change

Question 2

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.

Accepted Answer

A)  correctly;adaptively;inflexible 
B)  correctly;rationally;flexible 
C)  incorrectly;adaptively;inflexible 
D)  incorrectly;rationally;flexible 
E)  correctly;rationally;inflexible 
A)  correctly;adaptively;inflexible 
B)  correctly;rationally;flexible 
C)  incorrectly;adaptively;inflexible 
D)  incorrectly;rationally;flexible 
E)  correctly;rationally;inflexible

Question 3

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

Accepted Answer

A)  is less than 
B)  is greater than 
C)  equals 
D)  a and b 
A)  is less than 
B)  is greater than 
C)  equals 
D)  a and b

Question 4

The Friedman natural rate theory is based on rational expectations and is also called the new classical theory.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A)  neither the short run nor the long run. 
B)  both the short run and the long run. 
C)  the short run,but not in the long run. 
D)  the long run,but not in the short run. 
A)  neither the short run nor the long run. 
B)  both the short run and the long run. 
C)  the short run,but not in the long run. 
D)  the long run,but not in the short run.

Question 6

A fall in the expected price level leads to an expectation that real wages will ____________,which will cause people to work __________,shifting the SRAS curve _______________.

Accepted Answer

A)  rise;more;rightward 
B)  rise;less;leftward 
C)  fall;more;rightward 
D)  fall;less;leftward 
A)  rise;more;rightward 
B)  rise;less;leftward 
C)  fall;more;rightward 
D)  fall;less;leftward

Question 7

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 8

Which theory of the business cycle emphasizes initiating changes in aggregate supply?

Accepted Answer

A)  the Friedman "fooling" theory 
B)  the real business cycle theory 
C)  the Keynesian theory 
D)  the new classical theory 
A)  the Friedman "fooling" theory 
B)  the real business cycle theory 
C)  the Keynesian theory 
D)  the new classical theory

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)  Robert Solow. 
B)  Paul Samuelson. 
C)  Milton Friedman. 
D)  Robert Lucas. 
E)  John Maynard Keynes. 
A)  Robert Solow. 
B)  Paul Samuelson. 
C)  Milton Friedman. 
D)  Robert Lucas. 
E)  John Maynard Keynes.

Question 11

Explain why there is an inverse relationship between wage inflation and unemployment as aggregate demand changes.

Accepted Answer

In an economy with increasing aggregate

Question 12

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

Accepted Answer

A)  direct;prices;unemployment rate 
B)  inverse;money wage rates;unemployment rate 
C)  inverse;prices;unemployment 
D)  direct;money wage rates;money supply 
E)  inverse;money wage rates;money supply 
A)  direct;prices;unemployment rate 
B)  inverse;money wage rates;unemployment rate 
C)  inverse;prices;unemployment 
D)  direct;money wage rates;money supply 
E)  inverse;money wage rates;money supply

Question 13

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

Accepted Answer

A)  fall in Real GDP. 
B)  fall in nominal GDP. 
C)  lower rate of price inflation. 
D)  higher rate of wage inflation. 
A)  fall in Real GDP. 
B)  fall in nominal GDP. 
C)  lower rate of price inflation. 
D)  higher rate of wage inflation.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 16-3  
-Refer to Exhibit 16-3.The economy is at point A.As the result of an unexpected increase in aggregate demand,in the short run,the Friedman natural rate theory would predict

Accepted Answer

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

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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 long run point _____________ best represents the new state of the economy.

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D 
E)  E 
A)  A 
B)  B 
C)  C 
D)  D 
E)  E

Question 19

Two key assumptions of new Keynesian theory include:

Accepted Answer

A)  (1)people hold rational expectations,and (2)wages and prices are not completely flexible in the short run. 
B)  (1)people hold adaptive expectations,and (2)wages and prices are inflexible. 
C)  (1)people hold rational expectations,and (2)wages and prices are flexible. 
D)  (1)people hold neither adaptive nor rational expectations and (2)prices are inflexible. 
E)  none of the above 
A)  (1)people hold rational expectations,and (2)wages and prices are not completely flexible in the short run. 
B)  (1)people hold adaptive expectations,and (2)wages and prices are inflexible. 
C)  (1)people hold rational expectations,and (2)wages and prices are flexible. 
D)  (1)people hold neither adaptive nor rational expectations and (2)prices are inflexible. 
E)  none of the above

Question 20

Exhibit 16-6  
-Refer to Exhibit 16-6.The economy is initially in long-run equilibrium at point A.There is a correctly anticipated increase in aggregate demand,prices and wages are flexible,the economy is self-regulating,and people hold rational expectations.The economy will move to point

Accepted Answer

A)  F. 
B)  C. 
C)  B. 
D)  B or C. 
E)  This exhibit does not show the point the economy would move to. 
A)  F. 
B)  C. 
C)  B. 
D)  B or C. 
E)  This exhibit does not show the point the economy would move to.

Exam 16: Expectations Theory and the Economy

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

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.

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

The Friedman natural rate theory is based on rational expectations and is also called the new classical theory.

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

A fall in the expected price level leads to an expectation that real wages will ____________,which will cause people to work __________,shifting the SRAS curve _______________.

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?

Which theory of the business cycle emphasizes initiating changes in aggregate supply?

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

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

Explain why there is an inverse relationship between wage inflation and unemployment as aggregate demand changes.

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

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

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

Exhibit 16-3 -Refer to Exhibit 16-3.The economy is at point A.As the result of an unexpected increase in aggregate demand,in the short run,the Friedman natural rate theory would predict

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

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

Two key assumptions of new Keynesian theory include:

Exhibit 16-6 -Refer to Exhibit 16-6.The economy is initially in long-run equilibrium at point A.There is a correctly anticipated increase in aggregate demand,prices and wages are flexible,the economy is self-regulating,and people hold rational expectations.The economy will move to point

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

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 fall in the expected price level leads to an expectation that real wages will ,which will cause people to work ,shifting the SRAS curve _____.

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?

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