Question 1

The simple Phillips curve model continues to perform well in many countries where three conditions are present. Which of the following is NOT one of the three conditions?

Accepted Answer

The simple Phillips curve model assumes relatively few supply shocks, a stable natural rate of unemployment, and stable inflation expectations. It does not assume relatively few demand shocks; in fact, the model often examines how demand shocks affect inflation and unemployment.

Question 2

Jane assumes that tomorrow's weather will be like today's weather. Jane's expectation of the weather is consistent with _____ expectations.

Accepted Answer

Adaptive expectations involve forming forecasts of future events based on past experiences or data, such as assuming tomorrow's weather will be like today's.

Question 3

Expecting the future to be like the recent past is an approach to forming expectations that economists call _____ expectations.

Accepted Answer

Adaptive expectations is the approach where people form their expectations of the future based on recent past experiences and events.

Question 4

Jonah earned a C in ECON 101, and so he expects to earn a C in ECON 102. Jonah's prediction is consistent with _____ expectations.

Accepted Answer

Adaptive expectations theory suggests that people predict future values of variables such as inflation or grades based on past experiences. Jonah's expectation of earning a C in ECON 102 based on his grade in ECON 101 aligns with this theory, as he is adapting his expectations based on his previous outcome.

Question 5

Marcela earned a C in ECON 101. She predicts that she will earn a B in ECON 102 next semester because she will be taking fewer credit hours and she will have a new tutor. Marcela's prediction is consistent with _____ expectations.

Accepted Answer

Marcela's prediction is based on specific information (taking fewer credit hours and having a new tutor) that she believes will positively impact her performance. This approach aligns with rational expectations, where individuals use all available information to make forecasts.

Question 6

Which of the following is NOT consistent with the rational expectations hypothesis?

Accepted Answer

The rational expectations hypothesis suggests that individuals form their expectations about the future based on all available information, including how they understand the economy operates, rather than simply assuming that the future will mirror the present. This means that while past and current information, as well as an understanding of economic mechanisms, are used to inform expectations (consistent with A, B, and C), assuming the future will just continue the current situation without incorporating available information and understanding (D) does not align with the rational expectations hypothesis.

Question 7

The view that people use all available information, including their past experiences, in forming their expectations and that these expectations impact their behavior is known as the _____ view.

Accepted Answer

The rational expectations view posits that individuals form their expectations about the future based on all available information, including historical data, and that these expectations influence their economic decisions. This contrasts with the adaptive expectations hypothesis, which suggests that people form their expectations based solely on past rates of inflation or other economic indicators, without considering more comprehensive information sets.

Question 8

If people form expectations in accordance with the rational expectations hypothesis and they correctly anticipate policy actions, then the policies will:

Accepted Answer

Under the rational expectations hypothesis, individuals use all available information to make forecasts about future policy actions. If they correctly anticipate policy actions, these actions are already incorporated into their decision-making, leading to no impact on output in either the short run or the long run, as adjustments are made in advance.

Question 9

Which of the following statements is consistent with the adaptive expectations view?

Accepted Answer

The adaptive expectations view suggests that future expectations are formed based on past experiences and outcomes. Therefore, the statement "The past repeats itself in the future" is consistent with this view, as it implies that past trends and patterns are expected to continue into the future.

Question 10

Manu has received a 2% raise each year for the past 10 years. The company where he works has just experienced its most profitable year during that time, and Manu has had his most productive year yet and was the most productive worker in his section. Which of the following expectations of next year's salary would be consistent with Manu basing his expectations on rational expectations?

Accepted Answer

The answer of Manu has received a 2% raise each...

Question 11

Policymakers want to collect 10% more in sales tax revenue next year, and so they raise the sales tax rate by 10% from 5% to 5.5%. Which of the following assessments would be consistent with adaptive expectations? Next year sales tax revenue will:

Accepted Answer

Adaptive expectations assume that people form expectations based on past experience. In this case, people would expect sales tax revenue to increase by 10% because the sales tax rate has increased by 10%.

Question 12

Policymakers want to collect 10% more in sales tax revenue next year, and so they raise the sales tax rate by 10% from 5% to 5.5%. Which of the following assessments would be consistent with rational expectations? Next year, sales tax revenue will:

Accepted Answer

Raising the sales tax rate from 5% to 5.5% is a 10% increase in the rate itself, but the actual impact on sales tax revenue depends on how consumers respond to the price increase. If consumers reduce their spending due to higher prices, the increase in revenue will be less than 10%. This is consistent with the concept of elasticity of demand, where a price increase can lead to a decrease in the quantity demanded, thus affecting total revenue.

Question 13

In 1997, the British government suddenly announced that the central bank, the Bank of England, would become independent. Evidence shows that the public immediately began to expect lower inflation. This behavior in forming expectations is consistent with _____ expectations.

Accepted Answer

Rational expectations theory suggests that individuals form their expectations about the future based on all available information. In this case, the public expected lower inflation upon hearing the announcement of the Bank of England's independence, presumably because they believed an independent central bank would be more effective at controlling inflation. This demonstrates the use of available information to update expectations, consistent with rational expectations.

Question 14

An important lesson from the Lucas critique that policymakers need to heed is that policy will have its desired impact when policymakers:

Accepted Answer

The Lucas critique emphasizes the importance of considering how people's expectations change in response to policy. It suggests that policies based on historical data without considering these changes may not have their intended effect because individuals adjust their behavior based on their expectations of future policy actions.

Question 15

Which of the following statements is consistent with the Lucas critique?

Accepted Answer

The Lucas critique argues that economic policies cannot be accurately evaluated based on historical data alone because people's behavior changes in response to new policies, which is related to the idea that "correlation is not causation."

Question 16

The view that past correlations may not apply in the future because policy changes may impact expectations and behavior is consistent with:

Accepted Answer

The Lucas critique posits that economic policies cannot be predicted based on historical data alone because people's expectations and behaviors change when policies change, rendering past correlations potentially inapplicable in predicting future outcomes.

Question 17

The Lucas critique noted that:

Accepted Answer

The Lucas critique argues that economic policies cannot rely on historical data alone for their predictions because once a new policy is implemented, people's behavior may change in anticipation of its effects, thus altering the statistical relationships observed in the past.

Question 18

How does the Lucas critique relate to analysis using the simple Phillips curve? The Lucas critique:

Accepted Answer

The Lucas critique argues that economic policies based on historical data (like the simple Phillips curve relationship between inflation and unemployment) may not be reliable because people's behavior changes in response to policy changes. This means the relationship depicted in the simple Phillips curve may not hold under new policies, as expectations and behaviors adjust.

Question 19

How is the unexpected inflation rate measured on the expectations-augmented Phillips curve?

Accepted Answer

The unexpected inflation rate on the expectations-augmented Phillips curve is measured as the actual inflation rate minus the expected inflation rate. This reflects the difference between what was anticipated and what actually occurred.

Question 20

The graph below shows an expectations-augmented Phillips curve. If inflation is higher than expected, then unemployment is below the natural rate. If inflation is lower than expected, then unemployment is higher than the natural rate. For example, if inflation is expected to be 5% but actual inflation is 2%, then:

Accepted Answer

The answer of The graph below shows an expectations-augmented Phillips...

Quiz 30: Inflation Expectations and Stabilization Policies