Deck 16: Interest,rent,and Profit

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

A person's real wage will fall if the nominal wage falls,the price level rises,or both.

Question 7

If stagflation is present the short-run Phillips curve is vertical.

Question 8

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.

Question 9

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

Question 10

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

Question 11

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

Question 12

New Keynesian theory differs from new classical theory in that New Keynesian theory assumes that wages and prices are not completely flexible in the short-run,while fully flexible wages and prices are an assumption of new classical theory.

Question 13

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

Question 14

As long as some people anticipate policy,the economic consequences may be the same as if all persons do so.

Question 15

According to new classical theory,if policy is correctly anticipated,expectations are formed rationally,and wages and prices are fully flexible,then an increase in aggregate demand will change Real GDP,but not the price level.

Question 16

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

Question 17

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.

Question 18

New classical economists believe that it is possible under certain circumstances for an increase in the money supply to lead to a decrease in Real GDP in the short run.

Question 19

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

Question 20

One of the arguments supporting new classical theory is the policy ineffectiveness proposition (PIP).

Question 21

Implicit in the new Keynesian theory is that individuals form their expectations adaptively.

Question 22

Stagflation exists when an economy is experiencing high rates of both unemployment and inflation.

Question 23

Milton Friedman argued that there

A) are two Phillips curves,a short-run one and a long-run one.
B) are three Phillips curves,a short-run one,a long-run one,and one in stagflation.
C) is one Phillips curve,and it is vertical.
D) is one Phillips curve,and it is nearly flat or horizontal.

Question 24

Wages and prices are assumed to be completely inflexible in the new classical theory.

Question 25

The short-run Phillips curve holds that

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 26

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

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

Question 27

Refer to Exhibit 16-1.Milton Friedman would most likely have called the vertical line on which points A and C are located the

A) long-run aggregate supply curve.
B) Friedman curve.
C) long-run Phillips curve.
D) short-run aggregate supply curve.
E) short-run Phillips curve.

Question 28

The Phillips curve that Samuelson and Solow fitted to their data was

A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.

Question 29

The simultaneous occurrence of high inflation and high unemployment is called

A) reverberation.
B) disinflation.
C) stagflation.
D) "fooling."

Question 30

Stagflation implies that

A) a tradeoff between inflation and unemployment may not always exist.
B) policymakers can choose to have less unemployment if they are willing to accept a higher rate of inflation.
C) the short-run Phillips curve is stable.
D) the short-run Phillips curve is vertical.

Question 31

In their 1960 article,Paul Samuelson and Robert Solow found

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 32

A.W.Phillips collected data on the rate of change in money wages and plotted it against unemployment rates in the United Kingdom.The curve he fit to the data showed that

A) the rate of change of money wage rates and unemployment rates were inversely related.
B) the rate of change of money wage rates and unemployment rates were directly related.
C) the rate of change of money wage rates and unemployment rates were independent.
D) as money wage rates increased,the unemployment rate was cut in more than half.

Question 33

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

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

Question 34

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

Question 35

Refer to Exhibit 16-1.Suppose the economy is currently at point B on the short-run Phillips curve,SRPC₁.What could get the economy to move to point C on SRPC₂?

A) The realization on the part of workers that their currently held expected inflation rate is too high; they revise it upward,thus shifting the short-run aggregate supply curve rightward.
B) The realization on the part of workers that their currently held expected inflation rate is too high; they revise it downward,thus shifting the short-run aggregate supply curve rightward.
C) The realization on the part of workers that their currently held expected inflation rate is too low; they revise it upward,thus shifting the short-run aggregate supply curve leftward.
D) The realization on the part of workers that their currently held expected inflation rate is too low; they revise it downward,thus shifting the short-run aggregate supply curve rightward.

Question 36

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

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

Question 37

One of the key assumptions of the new classical theory is that individuals form their expectations rationally.

Question 38

Stagflation is the simultaneous occurrence of

A) low inflation and high unemployment.
B) high inflation and low unemployment.
C) low inflation and low unemployment.
D) high inflation and high unemployment.

Question 39

Milton Friedman argued that there is a

A) permanent downward-sloping Phillips curve.
B) temporary downward-sloping Phillips curve.
C) temporary upward-sloping Phillips curve.
D) permanent upward-sloping Phillips curve.

Question 40

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?

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 41

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

A) there will be a short-run tradeoff between inflation and unemployment,but there will not be a long-run tradeoff.
B) there will be a long-run tradeoff between inflation and unemployment,but there will not be a short-run tradeoff.
C) there will be both a long-run and a short-run tradeoff between inflation and unemployment.
D) there will be neither a long-run nor a short-run tradeoff between inflation and unemployment.
E) there may be a short-run tradeoff between inflation and unemployment,but one cannot say for certain whether there will be a long-run tradeoff.

Question 42

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

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

Question 43

When everyone correctly anticipates that the Fed will buy government securities,then they know that prices will increase.Which of the following adjustments is not likely to occur?

A) Workers will negotiate higher wages.
B) Suppliers of resources will demand higher prices for their resources.
C) Producers will prevent the price level from increasing and hurting their sales.
D) Producers will raise prices.

Question 44

New classical economists believe that there is

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 45

Refer to Exhibit 16-2.Suppose the economy starts out at point A and the public correctly anticipates that the AD curve will shift from AD₁ to AD₂.If wages are temporarily fixed,SRAS₁ will __________ and the economy will end up at point __________.

A) shift; D
B) shift; B
C) not shift; D
D) not shift; E

Question 46

Refer to Exhibit 16-2.Suppose the economy starts at point B.Fed monetary policy shifts the AD curve to AD₁.If policy is correctly anticipated and people hold rational expectations,according to new classical theory the economy in the short run will

A) move to A.
B) stay at B.
C) move to F.
D) move to E.

Question 47

New Keynesian theorists argue that

A) price and wage adjustments in response to policy changes often overcompensate and cause further price disruptions.
B) prices and wages may not be free to adjust in response to policy changes.
C) unions and big business have considerable power and often choose not to change wages and prices so as to deliberately offset policy changes enacted by the government.
D) the Fed and the Congress rarely do what they say they will do,so one should never listen to what they say.
E) new classical rational expectations theories about how expectations are formed are completely wrong.

Question 48

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.

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

Question 49

Refer to Exhibit 16-2.Suppose the economy starts at point A.The AD curve shifts from AD₁ to AD₂ and the public perfectly anticipates this.Under new Keynesian macroeconomic assumptions,the most likely short-run equilibrium point will be

A) point B.
B) point E.
C) somewhere on the line between point D and point B.
D) somewhere on the line between point E and point B.

Question 50

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

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

Question 51

Starting from long-run equilibrium,if the public anticipates that policymakers will increase aggregate demand by less than policymakers do increase aggregate demand,and if the short-run aggregate supply curve fully adjusts to the (incorrectly)anticipated increase in aggregate demand,then Real GDP will __________ and the price level will __________.

A) rise; rise
B) decline; fall
C) stay constant; rise
D) decline; rise

Question 52

According to new classical economists,if a decrease in aggregate demand is correctly anticipated,the short-run aggregate supply curve will shift __________ at the same time the AD curve shifts _________ so that there will be no change in Real GDP.

A) rightward; rightward
B) leftward; rightward
C) leftward; leftward
D) rightward; leftward
E) none of the above

Question 53

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

A) short-run Phillips curve will be upward sloping,but the long-run Phillips curve will be downward-sloping.
B) long-run Phillips curve will be upward sloping,but the short-run Phillips curve will be downward-sloping.
C) short-run Phillips curve will be upward sloping,but the long-run Phillips curve will be vertical.
D) long run Phillips curve will be upward sloping,but the short-run Phillips curve will be vertical.
E) short- and long-run Phillips curves will be vertical.

Question 54

If the public has rational expectations,

A) the only effective policy would be one that is implemented by surprise.
B) if the public incorrectly anticipates a given policy,there could be adverse results.
C) if policymakers do not do what they say they are going to do,then there could be adverse results.
D) a,b,and c
E) none of the above

Question 55

The difference between new classical theory and new Keynesian theory is that

A) in new classical theory wages are assumed to be flexible,and in new Keynesian theory wages are assumed to be somewhat inflexible.
B) in new classical theory wages are assumed to be somewhat inflexible,and in new Keynesian theory wages are assumed to be flexible.
C) adaptive expectations is the dominant expectations theory in new classical theory,and rational expectations is the dominant expectations theory in new Keynesian theory.
D) in new Keynesian theory the short-run aggregate supply curve is vertical,and in new classical theory the short-run aggregate supply curve is upward sloping.

Question 56

Refer to Exhibit 16-2.Suppose the economy starts at point A.Fed monetary policy shifts the AD curve to AD₂.A rise in Real GDP is likely if the economy operates under __________ assumptions,such as wage and price __________.

A) new classical; flexibility
B) new classical; inflexibilities
C) new Keynesian; flexibility
D) new Keynesian; inflexibilities

Question 57

According to rational expectations theory,

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 58

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 __________.

A) new classical; flexibility
B) new classical; inflexibilities
C) new Keynesian; flexibility
D) new Keynesian; inflexibilities

Question 59

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

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 60

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

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

Question 61

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

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

Question 62

According to new Keynesian theory,if policy is correctly anticipated,increases in aggregate demand will stimulate the economy to higher levels of Real GDP and lower levels of unemployment in

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 not in the short run.

Question 63

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

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 64

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

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 65

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 ____________.

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

Question 66

New classical economists believe that if policy is correctly anticipated and if rational expectations hold,when the Fed increases the money supply the result will be a(n)______________ in the price level and ____________________________.

A) decrease; no change in Real GDP
B) decrease; decrease in Real GDP
C) increase; no change in Real GDP
D) increase; increase in Real GDP

Question 67

If expectations are formed rationally,wages and prices are completely flexible in both the short run and the long run,and policy is correctly anticipated,increases in aggregate demand will stimulate the economy to higher levels of Real GDP in

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 not in the short run.

Question 68

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

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 69

The Friedman natural rate theory implies that there is a tradeoff between inflation and unemployment in

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 70

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

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 71

The difference between the new classical theory and the new Keynesian theory is the assumption of

A) rational expectations.
B) adaptive expectations.
C) complete flexibility of wages and prices in the short run.
D) a and c
E) b and c

Question 72

Refer to Exhibit 16-3.The economy is at point A.According to the Friedman natural rate theory,in the long run after a rise in the money supply,the economy will be at point

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

Question 73

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

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

Question 74

The original (1958)Phillips curve stated that

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 75

The Friedman natural rate theory states that

A) in both the short run and the long run the economy stays at its natural rate of unemployment.
B) the economy will not return to its natural rate of unemployment in either the short run or the long run.
C) the economy stays at its natural rate of unemployment in the short run,but not in the long run.
D) in the long run the economy returns to its natural rate of unemployment.

Question 76

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

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 77

The original (1958)Phillips curve

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 78

Stagflation

A) is highly unlikely if the Phillips curve is downward sloping.
B) implies that a tradeoff between inflation and unemployment may not always exist.
C) is the simultaneous occurrence of high rates of inflation and unemployment.
D) b and c
E) a,b,and c

Question 79

The original Phillips curve depicted the relationship between

A) price inflation and unemployment.
B) price inflation and employment.
C) wage inflation and unemployment.
D) wage inflation and employment.

Question 80

The Samuelson-Solow version of the Phillips curve states that

A) there is an inverse relationship between the wage inflation rate
And unemployment.
B) there is a direct relationship between the wage inflation rate
And unemployment.
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 b