Question 1

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;higherF) D) and E)
G) C) and D)

Question 2

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,AF) B) and C)
G) A) and E)

Question 3

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;moreF) D) and E)
G) B) and E)

Question 4

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.F) A) and B)
G) B) and E)

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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 bF) C) and D)
G) A) and B)

Question 7

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 8

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 9

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 dF) A) and D)
G) A) and C)

Question 10

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.E) A) and B)
F) None of the above

Question 11

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 aboveF) A) and B)
G) D) and E)

Question 12

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 13

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.E) All of the above
F) C) and D)

Question 14

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 15

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 unchangedF) B) and E)
G) A) and D)

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.E) All of the above
F) None of the above

Question 17

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.E) A) and B)
F) A) and C)

Question 18

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 19

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 cF) None of the above
G) All of the above

Question 20

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

Exam 16: Expectations Theory and the Economy

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

Correct Answer
verified

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 .

Correct Answer
verified

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

Correct Answer
verified

The original (1958) Phillips curve

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

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 .

Correct Answer
verified

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

Correct Answer
verified

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.

Correct Answer
verified
An adverse supply shock would reduce the...
View Answer

New classical economists believe that there is

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

New classical economists build their theories upon

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified
The PIP is associated with the new class...
View Answer

According to rational expectations theory,

Correct Answer
verified

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

Correct Answer
verified

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.

Correct Answer
verified

In their 1960 article,Paul Samuelson and Robert Solow found

Correct Answer
verified

Correct Answer
verified

Exam 16: Expectations Theory and the Economy

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

Correct AnswerverifiedShow Answer

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 __________.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The original (1958) Phillips curve

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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 __________.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedAn adverse supply shock would reduce the...View AnswerShow Answer

New classical economists believe that there is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

New classical economists build their theories upon

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedThe PIP is associated with the new class...View AnswerShow Answer

According to rational expectations theory,

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

In their 1960 article,Paul Samuelson and Robert Solow found

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

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 .

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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 .

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
An adverse supply shock would reduce the...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The PIP is associated with the new class...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified