Question 1

A completely and accurately anticipated expansionary monetary policy will increase real output in the short run but not in the long run.

Accepted Answer

False

Question 2

A positive supply shock causes a leftward shift in the SRAS curve.

Accepted Answer

A positive supply shock causes an increase in aggregate supply, meaning the SRAS curve shifts to the right.

Question 3

When expansionary policy is unanticipated, it leads to a short-run expansion in output and employment.

Accepted Answer

Expansionary policy, such as increasing government spending or cutting taxes, is meant to stimulate economic growth and increase employment. If this policy is unanticipated, businesses and consumers may react by increasing their spending and investment, which leads to an increase in output and employment in the short run. However, in the long run, the effects of expansionary policy may lead to inflation and other economic imbalances.

Question 4

According to Milton Friedman, the short-run trade-off between unemployment and inflation comes from unanticipated inflation.

Accepted Answer

Milton Friedman's theory of the Phillips Curve states that there is a short-run trade-off between unemployment and inflation. However, he argued that this trade-off only exists if inflation is unanticipated. If inflation is anticipated, workers and firms will adjust their expectations, leading to a shift in the Phillips Curve and negating the trade-off.

Question 5

Some economists believe that inflation could actually help reduce unemployment in the short-run.

Accepted Answer

Some economists believe that a moderate level of inflation can stimulate spending and investment, which can in turn create new job opportunities and reduce unemployment in the short-run. However, this effect tends to be temporary and can have negative consequences in the long-run, such as reducing the purchasing power of consumers and eroding confidence in the economy.

Question 6

Rational expectations theory implies that the more completely the effects of policy makers are foreseen, the smaller their short run effects on real output and unemployment, and the greater their short run effects on the price level.

Accepted Answer

Rational expectations theory suggests that individuals base their expectations on all available information, including the expected effects of policy. If policy effects are completely foreseen, then individuals will adjust their behavior accordingly, resulting in smaller short run effects on real output and unemployment. However, if the policy effects are not fully anticipated, it may result in greater short run effects on the price level.

Question 7

A movement up along a short run Phillips Curve to an unemployment rate below the natural rate of unemployment will tend to shift the Phillips Curve up, once expectations adjust; a movement down along a short run Phillips Curve to an unemployment rate above the natural rate of unemployment will tend to shift the Phillips Curve down once expectations adjust.

Accepted Answer

This statement is true as it describes the concept of the Phillips Curve, which shows the inverse relationship between unemployment and inflation in the short run. If there is a temporary decrease in unemployment below the natural rate, it will lead to higher inflation expectations and shift the Phillips Curve up. Conversely, a temporary increase in unemployment above the natural rate will lead to lower inflation expectations and shift the Phillips Curve down. This is known as the "adaptive expectations" theory of the Phillips Curve.

Question 8

The Phillips Curve is steeper at higher rates of inflation and lower levels of unemployment.

Accepted Answer

The Phillips Curve shows the inverse relationship between inflation and unemployment. When the rate of inflation is high, the Phillips Curve becomes steeper, indicating that a small decrease in inflation requires a larger increase in unemployment. Conversely, when unemployment is low, the Phillips Curve is flatter, meaning that a small decrease in unemployment results in a larger increase in inflation. Therefore, the statement is true.

Question 9

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

If people expect economic fluctuations to be permanent and caused primarily by supply-side shifts, then they will likely adjust their expectations of future inflation and unemployment accordingly. This can lead to a positive relationship between the inflation rate and the unemployment rate, as higher inflation expectations can lead to higher wage demands and reduced investment, both of which can contribute to higher unemployment.

Question 10

The short-run Phillips curve is downward sloping but the long-run is a vertical line.

Accepted Answer

This statement is true. The short-run Phillips curve shows a negative relationship between inflation and unemployment, while the long-run Phillips curve is vertical because in the long run, changes in aggregate demand only affect the price level and not employment. This means that in the long run, there is no trade-off between unemployment and inflation.

Question 11

Activists believe that monetary and fiscal policy will only work if it comes as a surprise to the public.

Accepted Answer

Activists typically argue for the use of monetary and fiscal policy to manage economic conditions, but not necessarily that these policies must be a surprise. The effectiveness of these policies is debated among economists, with some theories suggesting predictability and transparency can enhance their effectiveness by managing expectations.

Question 12

The natural rate hypothesis states that the economy will self-correct back to the natural rate of unemployment, so that a move along a short run Phillips curve will not be permanent.

Accepted Answer

The natural rate hypothesis, also known as the natural rate of unemployment, suggests that the economy will eventually adjust and return to its natural rate of unemployment on its own. Therefore, a move along a short-run Phillips curve will not be permanent. This means that the economy will eventually return to its long-run equilibrium, and the rate of unemployment will return to its natural rate.

Question 13

The natural rate hypothesis suggests that improvements in technology that occur normally during the course of time will lead the economy to the natural rate of unemployment.

Accepted Answer

The answer of The natural rate hypothesis suggests that improvements...

Question 14

Decreases in aggregate demand move the economy down the short run aggregate supply and up the Phillips Curve.

Accepted Answer

Decreases in aggregate demand move the economy down along the short-run aggregate supply curve, leading to lower output and higher unemployment, which is represented by a movement up along the Phillips Curve. However, the Phillips Curve specifically describes the inverse relationship between unemployment and inflation, so a decrease in aggregate demand typically moves the economy to the right on the Phillips Curve, indicating higher unemployment and lower inflation, not up.

Question 15

Critics of the extreme rational expectations theory argue that wages and input prices do not adjust instantaneously.

Accepted Answer

Critics argue that in reality, there are often lags in the adjustment of wages and input prices, which makes it difficult for markets to immediately reach equilibrium as predicted by extreme rational expectations theory.

Question 16

An increase in aggregate demand would move the economy up and to the right along a short run aggregate supply curve and up and to the left along a Phillips Curve.

Accepted Answer

An increase in aggregate demand would shift the short run aggregate supply curve to the right, causing an increase in both output and the price level. This movement up and to the right along the short run aggregate supply curve is known as a demand-pull inflation. As for the Phillips Curve, an increase in aggregate demand would result in a decrease in the unemployment rate and an increase in inflation, causing the Phillips Curve to move up and to the left.

Question 17

Most macroeconomists believe that both fiscal and monetary policy can shift aggregate demand and that such interventions can be counterproductive.

Accepted Answer

Most macroeconomists believe that fiscal and monetary policies can be used to shift aggregate demand, but also caution that such interventions can be counterproductive if not well-designed and timed appropriately.

Question 18

The Phillips curve relationship can also be seen indirectly from the AD/AS model.

Accepted Answer

The AD/AS model shows the relationship between aggregate demand and aggregate supply, which can influence the overall price level and level of output in the economy. The Phillips curve, which describes the inverse relationship between unemployment and inflation, can also be seen in the AD/AS model as a movement along the AS curve. When unemployment is low and output is high, this can lead to upward pressure on prices and inflation, and vice versa. This relationship between unemployment and inflation is captured by the Phillips curve, which can be indirectly observed in the AD/AS model.

Question 19

Rational expectations theory suggests that government or central bank policies designed to change aggregate demand will be effective.

Accepted Answer

Rational expectations theory suggests that individuals have rational expectations about the future and can anticipate how government policies will affect the economy. Therefore, changes in policy may not have the intended effect on aggregate demand, as individuals may adjust their behavior accordingly.

Question 20

Either supply shocks or adjusting inflation expectations can shift the short run Phillips curve.

Accepted Answer

Both supply shocks and adjusting inflation expectations can shift the short run Phillips curve. Supply shocks, such as an increase in oil prices or natural disasters, can lead to a decrease in aggregate supply and shift the Phillips curve upward. Adjusting inflation expectations, such as through changes in monetary policy or public communication, can also shift the Phillips curve by changing the relationship between unemployment and inflation.

Quiz 19: Measuring Economic Performance