Question 1

Real business cycle theory emphasizes that an adverse supply shock will shift the LRAS curve leftward and cause a decline in Real GDP.

Accepted Answer

A) True 
 B)False

Question 2

The real business cycle theory focuses on the impact that changes in long-run aggregate supply will have on the business cycle.

Accepted Answer

A) True 
 B)False

Question 3

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 4

Describe the sequence of events that real business cycle theorists would use to explain how an adverse supply shock would impact the economy.Use your answer to explain why it is easy to confuse cause and effect between changes originating on the supply side and those that begin on the demand side.

Accepted Answer

An adverse supply shock would reduce the

Question 5

Samuelson and Solow,in their 1960 study of the Phillips curve as it applies to the U.S.experience,argued that there was a tradeoff between inflation and unemployment.Later experience showed their analysis to be

Accepted Answer

A)  entirely correct in every situation. 
B)  generally correct,but it could not explain stagflation. 
C)  wholly wrong in every situation. 
D)  in general agreement with rational expectations theory. 
E)  capable of explaining stagflation,but not other economic scenarios. 
A)  entirely correct in every situation. 
B)  generally correct,but it could not explain stagflation. 
C)  wholly wrong in every situation. 
D)  in general agreement with rational expectations theory. 
E)  capable of explaining stagflation,but not other economic scenarios.

Question 6

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 7

Exhibit 16-6  
-Refer to Exhibit 16-6.The economy is initially at point B.There is an unanticipated increase in aggregate demand,prices and wages are flexible,the economy is self-regulating,and people hold adaptive expectations.In the short run the economy will move to point __________ and in the long run the economy will be at point __________.

Accepted Answer

A)  F,C 
B)  F,D 
C)  E,B 
D)  E,C 
E)  E,A 
A)  F,C 
B)  F,D 
C)  E,B 
D)  E,C 
E)  E,A

Question 8

The Friedman natural rate theory holds that there is an inverse relationship between inflation and unemployment in the long run,but not in the short run.

Accepted Answer

A) True 
 B)False

Question 9

Describe the policy ineffectiveness proposition (PIP).Be sure to state which economic theory the PIP is associated with and the assumptions that are necessary for this argument to hold.

Accepted Answer

The PIP is associated with the new class

Question 10

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

Accepted Answer

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

Question 11

According to Milton Friedman,there are two Phillips curves,a short-run one and a long-run one.

Accepted Answer

A) True 
 B)False

Question 12

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 13

New classical economists believe that there is

Accepted Answer

A)  a short-run tradeoff between inflation and unemployment when policy is unanticipated. 
B)  a short-run tradeoff between inflation and unemployment when policy is correctly anticipated. 
C)  no short-run tradeoff between inflation and unemployment when policy is correctly anticipated. 
D)  a and b 
E)  a and c 
A)  a short-run tradeoff between inflation and unemployment when policy is unanticipated. 
B)  a short-run tradeoff between inflation and unemployment when policy is correctly anticipated. 
C)  no short-run tradeoff between inflation and unemployment when policy is correctly anticipated. 
D)  a and b 
E)  a and c

Question 14

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 15

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 __________.

Accepted Answer

A)  falls;falls;rises;fall;fall;less 
B)  falls;rises;rises;fall;rise;more 
C)  falls;rises;falls;fall;fall;less 
D)  rises;rises;falls;fall;rise;more 
E)  rises;falls;rises;fall;fall;more 
A)  falls;falls;rises;fall;fall;less 
B)  falls;rises;rises;fall;rise;more 
C)  falls;rises;falls;fall;fall;less 
D)  rises;rises;falls;fall;rise;more 
E)  rises;falls;rises;fall;fall;more

Question 16

In their 1960 article,Paul Samuelson and Robert Solow found

Accepted Answer

A)  a direct relationship between inflation and investment expenditures. 
B)  an inverse relationship between inflation and investment expenditures. 
C)  a direct relationship between inflation and unemployment. 
D)  an inverse relationship between inflation and unemployment. 
A)  a direct relationship between inflation and investment expenditures. 
B)  an inverse relationship between inflation and investment expenditures. 
C)  a direct relationship between inflation and unemployment. 
D)  an inverse relationship between inflation and unemployment.

Question 17

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

Accepted Answer

A)  stagflation. 
B)  low inflation and low unemployment. 
C)  high inflation and low unemployment. 
D)  high inflation and high unemployment. 
E)  a and d 
A)  stagflation. 
B)  low inflation and low unemployment. 
C)  high inflation and low unemployment. 
D)  high inflation and high unemployment. 
E)  a and d

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Which of the following assumptions is held by both the classical view and the new classical view?

Accepted Answer

A)  rational expectations 
B)  flexible wages and prices 
C)  flexible wages and sticky prices 
D)  adaptive expectations 
E)  a and b 
A)  rational expectations 
B)  flexible wages and prices 
C)  flexible wages and sticky prices 
D)  adaptive expectations 
E)  a and b

Question 20

New classical economists build their theories upon

Accepted Answer

A)  adaptive expectations. 
B)  inflexible wages and prices. 
C)  rational expectations. 
D)  the assumption that it takes a long time for markets to achieve equilibrium values. 
A)  adaptive expectations. 
B)  inflexible wages and prices. 
C)  rational expectations. 
D)  the assumption that it takes a long time for markets to achieve equilibrium values.

Exam 16: Expectations Theory and the Economy

Real business cycle theory emphasizes that an adverse supply shock will shift the LRAS curve leftward and cause a decline in Real GDP.

The real business cycle theory focuses on the impact that changes in long-run aggregate supply will have on the business cycle.

Describe the sequence of events that real business cycle theorists would use to explain how an adverse supply shock would impact the economy.Use your answer to explain why it is easy to confuse cause and effect between changes originating on the supply side and those that begin on the demand side.

Samuelson and Solow,in their 1960 study of the Phillips curve as it applies to the U.S.experience,argued that there was a tradeoff between inflation and unemployment.Later experience showed their analysis to be

The original (1958)Phillips curve

The Friedman natural rate theory holds that there is an inverse relationship between inflation and unemployment in the long run,but not in the short run.

Describe the policy ineffectiveness proposition (PIP).Be sure to state which economic theory the PIP is associated with and the assumptions that are necessary for this argument to hold.

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

According to Milton Friedman,there are two Phillips curves,a short-run one and a long-run one.

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 __________.

New classical economists believe that there is

According to rational expectations theory,

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 __________.

In their 1960 article,Paul Samuelson and Robert Solow found

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

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

Which of the following assumptions is held by both the classical view and the new classical view?

New classical economists build their theories upon

What Economics Is About

Production Possibilities Frontier Framework

Supply and Demand: Theory

Prices: Free, controlled, and Relative

Supply,demand,and Price: Applications

Macroeconomic Measurements, Prices and Unemployment

Macroeconomic Measurements, Gdp and Real Gdp

Aggregate Demand and Aggregate Supply

Classical Macroeconomics and the Self-Regulating Economy

Keynesian Macroeconomics and Economic Instability: a Critique of the Self-Regulating Economy

Fiscal Policy and the Federal Budget

Money,banking,and the Financial System

The Federal Reserve System

Money and the Economy

Monetary Policy

Economic Growth: Resources, technology, ideas, and Institutions

The Financial Crisis of 2007-2009

Debates in Macroeconomics Over the Role and Effects of Government

Public Choice and Special-Interest-Group Politics

Building Theories to Explain Everyday Life: From Observations to Questions to Theories to Predictions

International Trade

International Finance

Globalization and International Impacts on the Economy

The Economic Case for and Against Government: Five Topics Considered

Stocks, bonds, futures, and Options

Agriculture: Problems, policies, and Unintended Effects

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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 .

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 .