Question 1

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 answer of Describe the policy ineffectiveness proposition (PIP). Be...

Question 2

Exhibit 16-10
 
-Refer to Exhibit 16-10. Assume that the starting point is point 1. Suppose that the government implements expansionary fiscal policy that raises aggregate demand. Which of the following best goes with the diagram shown?

Accepted Answer

The answer of Exhibit 16-10
 
-Refer to Exhibit 16-10. Assume...

Question 3

According to Friedman, in which of the following situations is the economy in long-run equilibrium?

Accepted Answer

The answer of According to Friedman, in which of the...

Question 4

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

The answer of Describe the sequence of events that real...

Question 5

Explain why there is an inverse relationship between wage inflation and unemployment as aggregate demand changes.

Accepted Answer

The answer of Explain why there is an inverse relationship...

Question 6

In what ways does the original Phillips curve differ from the Phillips curve created by economists Samuelson and Solow? What conclusions did economists draw based on the findings of Phillips, Samuelson and Solow?

Accepted Answer

The answer of In what ways does the original Phillips...

Question 7

Suppose that the Fed expects to increase the money supply by $54 billion, but economic agents expect that the increase will be closer to $81 billion. Using rational expectations theory, the result will be ______________ Real GDP and a ________________ price level.

Accepted Answer

Rational expectations theory suggests that individuals make predictions using all available information and economic principles. In this case, economic agents' expectations of a higher increase in the money supply than the Fed's expectation would lead them to anticipate inflationary pressures, which would lead to an increase in the price level. As a result, producers would likely produce less due to the expectation of higher input costs, leading to lower real GDP. Therefore, the result would be lower real GDP and a higher price level.

Question 8

Explain the difference between how adaptive expectations are formed and how rational expectations are formed. How does this difference affect the speed at which economic variables are expected to change?

Accepted Answer

The answer of Explain the difference between how adaptive expectations...

Question 9

Exhibit 16-11
 
-Refer to Exhibit 16-11. Assume that the starting point is point 1. Suppose that there is a supply-side change capable of reducing the capacity of the economy to produce. Which of the following best goes with the diagram shown?

Accepted Answer

Real business cycle theory suggests that changes in supply-side factors, such as technology or natural disasters, can cause fluctuations in the economy. This would be represented by a leftward shift in the production function curve in the diagram.

Question 10

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

Accepted Answer

The answer of Which of the following assumptions is held...

Quiz 16: Expectations Theory and the Economy