Question 1

Which of the following is false?

Accepted Answer

A)   If people can anticipate the plans of policy makers and alter their behavior quickly, their behavior could neutralize the intended impact of government action on real GDP.
B)   The theory of rational expectations leads to optimistic conclusions regarding macroeconomic policy's ability to achieve its intended economic goals.
C)   Rational expectation economists believe that wages and prices are flexible, and that workers and consumers incorporate the likely consequences of government policy changes quickly into their expectations.
D)   Catching consumers and businessmen off-guard with macroeconomic policy changes gets harder the more you try to do it. B

Question 2

If people underestimate the effects of expansionary policy,an increase in the growth rate of aggregate demand will tend to increase real GDP:

Accepted Answer

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

Question 3

In the rational expectation model,government control over aggregate demand:

Accepted Answer

A)   gives it the power to alter real output and employment even when the effects of government policies are expected.
B)   can affect real output in the short-run only if policies are unexpected.
C)   has potential to change long-run real output as long as the aggregate supply curve is vertical.
D)   has highly unpredictable effects on real output in the long run. B

Question 4

If people expect economic fluctuations to be permanent and caused primarily by supply-side shifts,then the result is likely to be a positive relationship between the inflation rate and the unemployment rate.

Accepted Answer

A) True 
 B)False

Question 5

According to the theory of rational expectations,when it comes to expected changes in the inflation rate,the short-run Phillips curve would be:

Accepted Answer

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

Question 6

If the shifts in AD that will result from policy changes are fully and accurately anticipated,an increase in government purchases or a decrease in taxes would result in which of the following in the short run?

Accepted Answer

A)   a higher level of real output and a higher price level
B)   a higher level of real output but no change in the price level
C)   a higher price level and a reduced level of real output
D)   a higher price level but no change in real output

Question 7

With rational expectations,a policy that would decrease AD would lead to:

Accepted Answer

A)   lower inflation and lower unemployment in the short run if people underestimated the effect of the policy on inflation.
B)   lower inflation and higher unemployment in the short run if people underestimated the effect of the policy on inflation.
C)   lower inflation and an indeterminate effect on unemployment in the short run, if people's expectations were correct.
D)   both (b)  and (c) .

Question 8

If all decisions makers had rational expectations and their expectations were correct,would the Phillips curve be vertical or horizontal in the short-run? Explain why.

Accepted Answer

The answer of If all decisions makers had rational expectations...

Question 9

If the actual unemployment rate is less than the natural rate of unemployment,there will be a tendency toward:

Accepted Answer

A)   increased inflation and a leftward shift of the short-run Phillips curve.
B)   decreased inflation and a rightward shift of the short-run Phillips curve.
C)   increased inflation and a rightward shift of the short-run Phillips curve.
D)   decreased inflation and a leftward shift of the short-run Phillips curve.

Question 10

Which of the following would shift the short-run Phillips curve?

Accepted Answer

A)   an negative supply shock
B)   an increase in inflationary expectations
C)   a decrease in inflationary expectations
D)   All of the above.

Question 11

If people have rational expectations,but they are not always correct in their expectations,the expectation of a higher inflation rate will cause:

Accepted Answer

A)   the short-run Phillips curve to become vertical.
B)   the short-run Phillips curve to shift leftward.
C)   a movement up along a short-run Phillips curve.
D)   the short-run Phillips curve to shift rightward.

Question 12

Which of the following is true?

Accepted Answer

A)   Inflation and unemployment rates can both increase in the short run in response to negative supply shocks.
B)   Inflation and unemployment rates cannot both decrease in the short run in response to reduced aggregate demand.
C)   Inflation and unemployment rates can both decrease in the short run in response to positive supply shocks.
D)   All of the above are true.

Question 13

A conclusion of the theory of rational expectations is that,in the short run,the impact of discretionary fiscal policies designed to shift the AD curve will:

Accepted Answer

A)   result in no net change in AD once people's expectations adjustments have been accounted for.
B)   shift AD in the opposite direction intended once people's expectations adjustments have been accounted for.
C)   be anticipated and compensated for, causing no significant effect on real or nominal GDP or employment.
D)   have to be a surprise to change real output in the intended direction.

Question 14

Rational expectations theory would imply that the graphical relationship between unemployment and inflation indicated by the Phillips curve is ____ in the short-run.

Accepted Answer

A)   vertical
B)   positively sloped
C)   negatively sloped
D)   horizontal

Question 15

Rational expectations are:

Accepted Answer

A)   forecasts that are technically correct.
B)   forecasts that, while not necessarily correct, are the best that can be made given the available data.
C)   forecasts that accurately predict the short-term future for wages and prices.
D)   forecasts made by economists based on sophisticated econometric models.

Question 16

The short-run Phillips curve will tend to shift during any period when:

Accepted Answer

A)   aggregate supply changes.
B)   real wages or input prices change because of changes in the supplies of labor or other inputs.
C)   inflationary expectations change.
D)   all of the above

Question 17

Believers in the hypothesis of rational expectations argue that:

Accepted Answer

A)   expansionary fiscal and monetary policy can reduce unemployment without creating inflation.
B)   a trade-off exists between unemployment and inflation even in the long run.
C)   the Phillips curve is vertical even in the short run for expected changes in inflation.
D)   the Phillips curve is downward sloping even in the long run.

Question 18

If people correctly anticipate the effects of expansionary policy,an increase in the growth rate of aggregate demand will tend to increase real GDP:

Accepted Answer

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

Question 19

Which of the following is closely associated with activists?

Accepted Answer

A)   external shocks to the economy
B)   aggregate demand management
C)   policy changes that come follow fixed rules
D)   avoiding supply shocks

Question 20

According to the rational expectation view,does the government have the ability to control the level of real output and unemployment?

Accepted Answer

A)   Only in the SR if it makes unexpected changes in aggregate demand.
B)   Only in the SR if it announces plans well in advance, so that expectations are affected.
C)   Only in the LR if it shifts AS instead of AD.
D)   Only in the LR if it uses monetary policy instead of fiscal policy.

Exam 27: Issues in Macroeconomic Theory and Policy