Question 1

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

According to real business cycle theory, LRAS is determined by technology, capital, and labor. A leftward shift in LRAS suggests a decrease in one or more of these factors, resulting in a decrease in potential output, i.e. Real GDP falls. This decrease in potential output leads to a rise in the price level due to the increased scarcity of goods and services in the economy, hence the price level rises. The decrease in potential output leads to a fall in the demand for labor, leading to a fall in money wages. As real wages are determined by the ratio of money wages to the price level, it falls due to the increased inflation rate. Lastly, as workers face lower real wages, they are less likely to work, so they choose to work less. Therefore, option C is the best choice.

Question 2

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.

Accepted Answer

According to the Friedman natural rate theory, when the government unexpectedly increases aggregate demand, in the short run, Real GDP rises due to increased economic activity, and the unemployment rate falls as more jobs are created to meet the higher demand.

Question 3

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

According to new classical theory, prices are flexible and adjust quickly to changes in aggregate demand. Therefore, an increase in aggregate demand will lead to an increase in prices (rise) and real GDP will remain unchanged in the long-run, as the economy will adjust to the new equilibrium level of output. This is known as the "long-run vertical Phillips curve".

Question 4

Milton Friedman argued that as long as

Accepted Answer

Milton Friedman believed in the concept of the natural rate of unemployment, which implies that in the long run, the economy tends toward full employment with a constant inflation rate called the expected inflation rate. If the actual inflation rate differs from expected inflation rate, it will cause a misallocation of resources and lead to a deviation from the long-run equilibrium. Hence, option C is the correct answer. The other options are not consistent with Milton Friedman's economic theories.

Question 5

One implication of the policy ineffectiveness proposition (PIP) is that expansionary __________ policy is not effective at raising __________.

Accepted Answer

The answer of One implication of the policy ineffectiveness proposition...

Question 6

The economist who, in his presidential address to the American Economic Association in 1967, attacked the idea of a permanent downward-sloping Phillips curve was

Accepted Answer

The economist who attacked the idea of a permanent downward-sloping Phillips curve was Milton Friedman in his presidential address to the American Economic Association in 1967. A.W. Phillips was the economist who first observed the relationship between unemployment and inflation, Paul Samuelson was a Nobel Laureate economist known for his contributions to modern economics, Robert Lucas and Thomas Sargent were Nobel Laureate economists who developed the theory of rational expectations.

Question 7

The economy was in long-run equilibrium when aggregate demand increased. At this point in time, the expected inflation has started to adjust to the new higher actual inflation rate. According to the (Friedman) natural rate theory, this means the unemployment rate in the economy must currently be

Accepted Answer

According to the natural rate theory, if aggregate demand increases and expected inflation starts to adjust to the new higher actual inflation rate, the economy will initially move away from long-run equilibrium and experience a temporary decrease in unemployment, also known as a cyclical boom. However, this decrease in unemployment cannot persist in the long run as workers and employers adjust their expectations and wages. Eventually, the unemployment rate will return to the natural rate, which is the rate that prevails in long-run equilibrium. Since the economy was initially in long-run equilibrium before the increase in aggregate demand, the natural rate of unemployment must be equal to what it was before. Therefore, as expected inflation adjusts, the unemployment rate must be increasing back to the natural rate, which implies that choice B is the correct answer.

Question 8

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand. In new Keynesian theory, the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

Accepted Answer

In new Keynesian theory, prices are sticky in the short run, so the price level will rise by less than it is predicted to rise in new classical theory, where prices are assumed to be perfectly flexible in the short run.

Question 9

Two key assumptions of new Keynesian theory include:

Accepted Answer

New Keynesian theory assumes that people have rational expectations and that wages and prices are not completely flexible in the short run. This means that in the short run, changes in demand do not necessarily lead to changes in prices and wages, but rather to changes in output and employment. This helps to explain why recessions can occur even when there is excess supply in the economy, as firms may be hesitant to lower prices or wages.

Question 10

The economy is initially in long-run equilibrium. Expectations are adaptive, prices and wages are flexible, and there is an unanticipated increase in aggregate demand. In the short run, the price level will be __________ than it was in long-run equilibrium and Real GDP will be __________ than it was in long-run equilibrium.

Accepted Answer

In the short run, an unanticipated increase in aggregate demand leads to higher prices as demand for goods and services increases. This also results in an increase in Real GDP as firms increase production to meet the higher demand, assuming prices and wages are flexible and can adjust quickly.

Question 11

The economist who won the Nobel Prize in Economics in 1995, and whose name is closely connected with rational expectations theory, is

Accepted Answer

Robert Lucas was awarded the Nobel Prize in Economics in 1995 for his work on rational expectations theory, which suggests that individuals and firms make decisions based on their expectations of future events and outcomes. This theory has had a significant impact on macroeconomic modeling and policymaking.

Question 12

The expected inflation rate is equal to the actual inflation rate. According to the (Friedman) natural rate theory, the economy is

Accepted Answer

According to the natural rate theory, the economy produces Natural Real GDP when the expected inflation rate is equal to the actual inflation rate. Therefore, the economy is not in a recessionary or inflationary gap, and is not biased towards producing more goods or services. The point on the short-run Phillips curve may not represent the long-run equilibrium due to adjustments in inflation expectations. Therefore, the best choice is E.

Question 13

Exhibit 16-4
 
-Refer to Exhibit 16-4. The economy is initially at point A, in long run equilibrium. A real business cycle would be represented by the following sequence of curve shifts:

Accepted Answer

Real business cycles are characterized by shifts in the long-run aggregate supply (LRAS) due to real factors such as technology or labor force changes, followed by adjustments in aggregate demand (AD) to the new level of potential output.

Question 14

Exhibit 16-4 -Refer to Exhibit 16-4. If LRAS₁ shifts to LRAS₂, and this causes AD₁ to shift to AD₂, economists would call this a

Accepted Answer

The shift in the long-run aggregate supply (LRAS) and aggregate demand (AD) described suggests a change in the economy that is consistent with real business cycle theory, which attributes fluctuations in the economy to real (i.e., non-monetary) factors.

Question 15

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

According to new classical theory, in the short run, the price level will rise and Real GDP will fall due to the incorrectly anticipated increase in aggregate demand. In the long run, the price level will be higher than it was before aggregate demand increased, but Real GDP will return to its natural rate. This is because wages and prices will eventually adjust to the new level of aggregate demand, restoring the economy to its long-run equilibrium.

Question 16

The Friedman natural rate theory is built upon

Accepted Answer

The Friedman natural rate theory is built upon adaptive expectations (B) and the concept of flexible wages and prices (C), which together argue against the idea of a stable, long-term trade-off between inflation and unemployment as suggested by one Phillips curve.

Question 17

According to Milton Friedman, the reason there are two Phillips curves is because

Accepted Answer

According to Milton Friedman, the reason there are two Phillips curves is that the expected inflation rate does not instantaneously adjust to changes in the actual inflation rate. This is because individuals and firms have incomplete and imperfect information about the economy and therefore their expectations about future inflation may not be immediately updated to reflect changes in actual inflation. As a result, there can be a short-run Phillips curve that shows a negative relationship between inflation and unemployment, and a long-run Phillips curve that shows no relationship between inflation and unemployment.

Question 18

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.

Accepted Answer

In the short run, an unanticipated increase in aggregate demand due to expansionary monetary policy will cause both the price level and Real GDP to rise, according to new classical theory. In the long run, the price level will be higher than it was before the increase in aggregate demand, as the economy adjusts and prices fully reflect the increased demand.

Question 19

According to new classical economists, when monetary and fiscal policies are __________ anticipated, people form their expectations __________, and wages and prices are __________, the policy ineffectiveness proposition (PIP) results.

Accepted Answer

New classical economists argue that when monetary and fiscal policies are correctly anticipated, people form their expectations rationally, and when wages and prices are flexible, the policy ineffectiveness proposition (PIP) results, indicating that systematic policy cannot systematically influence real output.

Question 20

New classical economists build their theories upon

Accepted Answer

New classical economists build their theories upon rational expectations, which assume that individuals make decisions based on all available information and adjust their actions accordingly. This leads to the belief that markets will quickly adjust to changes in supply and demand, and that government intervention can have negative consequences. The other options, such as adaptive expectations and inflexible wages and prices, were more commonly used in older economic theories.

Quiz 16: Expectations Theory and the Economy

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 .

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.

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 .

Milton Friedman argued that as long as

One implication of the policy ineffectiveness proposition (PIP) is that expansionary policy is not effective at raising .

The economist who, in his presidential address to the American Economic Association in 1967, attacked the idea of a permanent downward-sloping Phillips curve was

The economy was in long-run equilibrium when aggregate demand increased. At this point in time, the expected inflation has started to adjust to the new higher actual inflation rate. According to the (Friedman) natural rate theory, this means the unemployment rate in the economy must currently be

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand. In new Keynesian theory, the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

Two key assumptions of new Keynesian theory include:

The economist who won the Nobel Prize in Economics in 1995, and whose name is closely connected with rational expectations theory, is

The expected inflation rate is equal to the actual inflation rate. According to the (Friedman) natural rate theory, the economy is

Exhibit 16-4 -Refer to Exhibit 16-4. The economy is initially at point A, in long run equilibrium. A real business cycle would be represented by the following sequence of curve shifts:

Exhibit 16-4 -Refer to Exhibit 16-4. If LRAS₁ shifts to LRAS₂, and this causes AD₁ to shift to AD₂, economists would call this a

The Friedman natural rate theory is built upon

According to Milton Friedman, the reason there are two Phillips curves is because

According to new classical economists, when monetary and fiscal policies are anticipated, people form their expectations , and wages and prices are __, the policy ineffectiveness proposition (PIP) results.

New classical economists build their theories upon

Quiz 16: Expectations Theory and the Economy

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 __________.

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 __________.

Milton Friedman argued that as long as

One implication of the policy ineffectiveness proposition (PIP) is that expansionary __________ policy is not effective at raising __________.

The economist who, in his presidential address to the American Economic Association in 1967, attacked the idea of a permanent downward-sloping Phillips curve was

The economy was in long-run equilibrium when aggregate demand increased. At this point in time, the expected inflation has started to adjust to the new higher actual inflation rate. According to the (Friedman) natural rate theory, this means the unemployment rate in the economy must currently be

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand. In new Keynesian theory, the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

Two key assumptions of new Keynesian theory include:

The economist who won the Nobel Prize in Economics in 1995, and whose name is closely connected with rational expectations theory, is

The expected inflation rate is equal to the actual inflation rate. According to the (Friedman) natural rate theory, the economy is

Exhibit 16-4 -Refer to Exhibit 16-4. The economy is initially at point A, in long run equilibrium. A real business cycle would be represented by the following sequence of curve shifts:

Exhibit 16-4 -Refer to Exhibit 16-4. If LRAS1 shifts to LRAS2, and this causes AD1 to shift to AD2, economists would call this a

The Friedman natural rate theory is built upon

According to Milton Friedman, the reason there are two Phillips curves is because

According to new classical economists, when monetary and fiscal policies are __________ anticipated, people form their expectations __________, and wages and prices are __________, the policy ineffectiveness proposition (PIP) results.

New classical economists build their theories upon

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 .

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 .

One implication of the policy ineffectiveness proposition (PIP) is that expansionary policy is not effective at raising .

Exhibit 16-4 -Refer to Exhibit 16-4. If LRAS₁ shifts to LRAS₂, and this causes AD₁ to shift to AD₂, economists would call this a

According to new classical economists, when monetary and fiscal policies are anticipated, people form their expectations , and wages and prices are __, the policy ineffectiveness proposition (PIP) results.