Question 1

The view that individuals weigh all available evidence when they formulate their expectations about economic events (including information concerning the probable effects of current and future economic policy) is called:
A) the adaptive expectations hypothesis.
B) the permanent income hypothesis.
C) the rational expectations hypothesis.
D) the Phillips curve.

Accepted Answer

The view that individuals weigh all available evidence when they formulate their expectations about economic events, including information concerning the probable effects of current and future economic policy, is called the rational expectations hypothesis. This theory suggests that people make predictions based on all available information, including their understanding of government policy, rather than just relying on past data (adaptive expectations) or their current income level (permanent income hypothesis). The Phillips curve is a historical relationship between unemployment and inflation, and is not directly related to individuals' expectations.

Question 2

When people use recent information to gradually adjust their forecasts of inflation, they are said to have:
A) static expectations.
B) adaptive expectations.
C) rational expectations.
D) spiraling expectations.

Accepted Answer

The use of recent information to gradually adjust forecasts is known as adaptive expectations. This means people are updating their expectations based on past experiences which can result in a slow response to changes in inflation rate.

Question 3

Explain why rational expectations theorists do not support government intervention to alleviate unemployment. Explain their views on the effectiveness of fiscal policy and monetary policy.

Accepted Answer

The answer of Explain why rational expectations theorists do not...

Question 4

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?
A) a higher general level of prices but no change in real output
B) a higher general level of prices and an expansion in real output
C) no change in the general level of prices and a reduction in real output
D) no change in either the general level of prices or real output

Accepted Answer

The answer of Under the rational expectations hypothesis, which of...

Question 5

According to rational expectations theory, what information do businesses and workers use when they form their expectations regarding inflation?
A) recent events and data
B) Keynesian and monetarist models
C) forecasts by public-and private-sector economists
D) all the relevant information that is available

Accepted Answer

Rational expectations theory suggests that businesses and workers form their expectations based on all the relevant information that is available. This includes recent events and data, economic models, forecasts by public and private sector economists, and any other relevant information. The theory assumes that individuals are rational and have access to all necessary information, therefore they will use all available information to make their predictions about future inflation.

Question 6

If the economy is in recession, explain what advice you would give the President, if you were a monetarist economist. What if you were a Keynesian?

Accepted Answer

The answer of If the economy is in recession, explain...

Question 7

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E₁, and the Fed increases the money supply. If people have adaptive expectations, then the economy will move: A) to point A in the short run and point B in the long run. B) directly to point B. C) to point C in the short run and point D in the long run. D) directly to point D.

Accepted Answer

The answer of Exhibit 17-4 Short-run and long-run Phillips curves

Suppose...

Question 8

Which of the following best describes the idea of a political business cycle?
A) Politicians have a bias to cut taxes and increase government spending.
B) Special interests result in alternating federal deficits.
C) Politicians will use fiscal and monetary policy to cause output, real incomes, and employment to be rising prior to elections.
D) Good intentions of politicians influence the business cycle.

Accepted Answer

The political business cycle is the idea that politicians will manipulate the economy through fiscal and monetary policy in order to stimulate output, real incomes, and employment prior to elections. This is done in an attempt to increase their chances of electoral success.

Question 9

The proponents of rational expectations believe that:
A) there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy.
B) macro-policies that stimulate demand and place upward pressure on the general level if prices will temporarily increase output and employment.
C) the inflationary side effects of expansionary policies will be anticipated quickly, and therefore, even their short-run effects on real output and employment will be minimal.
D) discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.

Accepted Answer

Proponents of rational expectations believe that individuals have the ability to anticipate the effects of macro-policies on the economy, including inflationary side effects of expansionary policies. Therefore, even short-run effects on output and employment will be minimal.

Question 10

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase:
A) prices but not real output in the short run.
B) real output but not prices in the short run.
C) real output in the long run but not in the short run.
D) real output in both the long run and the short run.

Accepted Answer

Under the rational expectations hypothesis, if an expansionary policy is anticipated, people adjust their expectations accordingly. This means that prices adjust in anticipation of the policy, but since the policy's effects are already expected, it does not change real output in the short run. The economy adjusts immediately to the new expected conditions, leading to a change in prices without affecting real output in the short run.

Question 11

If people behave according to rational expectations theory, people would expect the rate of inflation this year to be:
A) the same as last year.
B) zero, regardless of the rate last year.
C) the rate based on predictable monetary and fiscal policies.
D) always higher than last year.

Accepted Answer

According to rational expectations theory, people form their expectations based on all available information, including predictable monetary and fiscal policies. Therefore, they would expect the rate of inflation this year based on those policies, which could result in an increase or decrease from the rate last year.

Question 12

What is the difference between the Keynesian and rational expectations theories concerning the success of stabilization policy?

Accepted Answer

The answer of What is the difference between the Keynesian...

Question 13

According to rational expectations theory, predictable expansionary monetary and fiscal policies to reduce the unemployment rate are:
A) desirable because the result is to lower inflation.
B) harmful because the only result is higher inflation.
C) ineffective on the price level.
D) successful in reducing unemployment in the long run.

Accepted Answer

Rational expectations theory suggests that individuals and businesses will anticipate the effects of monetary and fiscal policies. If a policy is predictable, people will adjust their behavior in advance, leading to inflation without reducing unemployment in the long run. This is because they expect that expansionary policies will lead to inflation and adjust their wage and price setting behavior accordingly, negating the intended stimulative effect on real economic activity.

Question 14

The rational expectations theory indicates that expansionary policy will:
A) stimulate real output in the long run but not in the short run.
B) expand real output and employment if the public quickly anticipates the effects of the expansionary policy.
C) equalize real and nominal interest rates during lengthy periods of inflation.
D) fail to increase employment because individuals will anticipate it and take actions that will offset its impact.

Accepted Answer

According to the rational expectations theory, individuals will adjust their behavior in anticipation of expansionary policy, resulting in no increase in employment.

Question 15

Which of the following models emphasizes the importance of credible, predictable government policies for maintaining full employment with low inflation?
A) the monetarist model
B) the Keynesian model
C) the supply-side model
D) the rational expectations model

Accepted Answer

The rational expectations model emphasizes the importance of credible, predictable government policies for maintaining full employment with low inflation. It suggests that if people expect policymakers to act in a certain way, those expectations will influence their economic decisions, thereby affecting the economy's performance.

Question 16

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will:
A) ignore the policy until it exerts an observable impact on prices, output, and employment.
B) quickly take steps to adjust their decision making in light of the more expansionary policies.
C) be fooled at the outset but eventually adjust their decision making in accordance with the change in policy.
D) be unaware that this policy change has been implemented until a higher rate of inflation is observed.

Accepted Answer

The rational expectations hypothesis suggests that individuals and businesses will quickly adjust their expectations and decision-making in anticipation of the effects of more expansionary monetary and fiscal policies, rather than waiting for observable impacts on prices, output, and employment.

Question 17

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E₁, and the Fed increases the money supply. If people have rational expectations, then the economy will move: A) to point A in the short run and point B in the long run. B) directly to point B. C) to point C in the short run and point D in the long run. D) directly to point D.

Accepted Answer

The answer of Exhibit 17-4 Short-run and long-run Phillips curves

Suppose...

Question 18

The political business cycle refers to the possibility that:
A) incumbent politicians will be reelected regardless of the state of the economy.
B) politicians will manipulate the economy to enhance their chances of being reelected.
C) there are more recessions prior to elections.
D) recessions coincide with election years.

Accepted Answer

The political business cycle theory suggests that politicians may manipulate the economy to improve their chances of being re-elected. This can be achieved through policies such as increasing government spending or decreasing taxes in the period leading up to an election. Therefore, option B is the best choice.

Question 19

"Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate." This statement best illustrates the:
A) Keynesian theory.
B) rational expectations theory.
C) incomes policy.
D) supply-side theory.

Accepted Answer

The statement suggests that individuals have rational expectations and adjust their behavior based on preannounced policy. This aligns with the assumptions of the rational expectations theory. The other options are not supported by the statement.

Question 20

Under adaptive expectations theory, a decrease in the short-run aggregate demand curve ____ the inflation rate and ____ the unemployment rate.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Accepted Answer

Under adaptive expectations theory, a decrease in short-run aggregate demand leads to a decrease in output and an increase in unemployment in the short run. This increase in unemployment leads to a decrease in wages and prices in the long run, which shifts the short-run aggregate supply curve downward, causing a decrease in inflation. Therefore, a decrease in short-run aggregate demand decreases the inflation rate and increases the unemployment rate.

Quiz 27: The Phillips Curve and Expectations Theory

The view that individuals weigh all available evidence when they formulate their expectations about economic events (including information concerning the probable effects of current and future economic policy) is called:

When people use recent information to gradually adjust their forecasts of inflation, they are said to have:

Explain why rational expectations theorists do not support government intervention to alleviate unemployment. Explain their views on the effectiveness of fiscal policy and monetary policy.

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?

According to rational expectations theory, what information do businesses and workers use when they form their expectations regarding inflation?

If the economy is in recession, explain what advice you would give the President, if you were a monetarist economist. What if you were a Keynesian?

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E₁, and the Fed increases the money supply. If people have adaptive expectations, then the economy will move:

Which of the following best describes the idea of a political business cycle?

The proponents of rational expectations believe that:

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase:

If people behave according to rational expectations theory, people would expect the rate of inflation this year to be:

What is the difference between the Keynesian and rational expectations theories concerning the success of stabilization policy?

According to rational expectations theory, predictable expansionary monetary and fiscal policies to reduce the unemployment rate are:

The rational expectations theory indicates that expansionary policy will:

Which of the following models emphasizes the importance of credible, predictable government policies for maintaining full employment with low inflation?

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will:

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E₁, and the Fed increases the money supply. If people have rational expectations, then the economy will move:

The political business cycle refers to the possibility that:

"Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate." This statement best illustrates the:

Under adaptive expectations theory, a decrease in the short-run aggregate demand curve the inflation rate and the unemployment rate.

Quiz 27: The Phillips Curve and Expectations Theory

The view that individuals weigh all available evidence when they formulate their expectations about economic events (including information concerning the probable effects of current and future economic policy) is called:

When people use recent information to gradually adjust their forecasts of inflation, they are said to have:

Explain why rational expectations theorists do not support government intervention to alleviate unemployment. Explain their views on the effectiveness of fiscal policy and monetary policy.

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?

According to rational expectations theory, what information do businesses and workers use when they form their expectations regarding inflation?

If the economy is in recession, explain what advice you would give the President, if you were a monetarist economist. What if you were a Keynesian?

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E1, and the Fed increases the money supply. If people have adaptive expectations, then the economy will move:

Which of the following best describes the idea of a political business cycle?

The proponents of rational expectations believe that:

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase:

If people behave according to rational expectations theory, people would expect the rate of inflation this year to be:

What is the difference between the Keynesian and rational expectations theories concerning the success of stabilization policy?

According to rational expectations theory, predictable expansionary monetary and fiscal policies to reduce the unemployment rate are:

The rational expectations theory indicates that expansionary policy will:

Which of the following models emphasizes the importance of credible, predictable government policies for maintaining full employment with low inflation?

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will:

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E1, and the Fed increases the money supply. If people have rational expectations, then the economy will move:

The political business cycle refers to the possibility that:

"Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate." This statement best illustrates the:

Under adaptive expectations theory, a decrease in the short-run aggregate demand curve ____ the inflation rate and ____ the unemployment rate.

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E₁, and the Fed increases the money supply. If people have adaptive expectations, then the economy will move:

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E₁, and the Fed increases the money supply. If people have rational expectations, then the economy will move:

Under adaptive expectations theory, a decrease in the short-run aggregate demand curve the inflation rate and the unemployment rate.