Exam 16: Expectations Theory and the Economy

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 more than people anticipate (bias downward).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.

New classical economists believe that monetary and fiscal policies are never effective.

Exhibit 16-2 -Refer to Exhibit 16-2.The Policy Ineffectiveness Proposition could be illustrated by a movement between points A and

The original Phillips curve depicted an inverse relationship between wage inflation and unemployment.

The economy is in long-run equilibrium when government unexpectedly increases aggregate demand.The expected inflation rate is slow to adjust to the higher (actual)inflation rate.If follows that in the short run,according to the Friedman natural rate theory,__________ rises and the __________ falls.

For the period 1961 to 1969,the Phillips curve for the United States displayed the same shape that A.W.Phillips found for the United Kingdom for the period 1861 to 1913---it was