Question 1

What will actual unemployment be (in relation to the natural rate)in each of the following cases? Use a graph of the modern Phillips curve in your answer.
a.Decision makers underestimate inflation.
b.Decision makers overestimate inflation.
c.Decision makers correctly forecast inflation.

Accepted Answer

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Question 2

According to the rational expectations theory,expansionary monetary policy will

Accepted Answer

According to the rational expectations theory, individuals make economic decisions based on their expectations of future events. Therefore, expansionary monetary policy will be quickly anticipated by individuals, leading to an increase in inflation. This is because individuals will adjust their behavior based on their understanding of monetary policy and its potential effects. In the short run, inflation will rise, and in the long run, the primary effect will be an increase in employment.

Question 3

What is the index of leading indicators,and what is it used for?

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Question 4

Explain two reasons why economic forecasting can only be of limited use.

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Question 5

What are the proper monetary and fiscal responses to a recession under the activist view and the nonactivist view?

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Question 6

What is the Phillips curve? What is the difference between the original Phillips curve and the "modern" view of the Phillips curve? What problems caused the abandonment of the ideas behind the original Phillips curve?

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Question 7

Between 1983 and 2007,the U.S.economy was in recession ___________ share of the time,compared to ___________ share of the time during 1910-1959.(Fill in the blank)

Accepted Answer

Between 1983 and 2007, the U.S. economy was in recession 6 percent of the time, compared to 33 percent of the time during 1910-1959.

Question 8

In order to make effective policy changes,policy makers need to know

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Question 9

How has macro-policy changed since the 1970s? How have the views of economists on the trade-off between inflation and unemployment changed?

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Question 10

Which of the following is part of the modern view of the Phillips curve?

Accepted Answer

The modern view of the Phillips curve suggests that when inflation is higher than expected, unemployment falls below its natural rate (A), and when inflation is lower than expected, unemployment rises above its natural rate (B). Additionally, the modern view recognizes that demand stimulus policies can temporarily reduce unemployment but will primarily impact prices (inflation) in the long run (C). Therefore, all of the above statements are correct (D).

Question 11

Which of the following variables are included in the index of leading indicators?

Accepted Answer

The variables included in the index of leading indicators are new orders placed with manufacturers, length of average workweek, and permits for new housing starts. The other variables listed are not included in this index.

Question 12

Suppose the annual rate of inflation has been 3 percent and the annual growth rate of the money supply has been 5 percent during the last few years.In the last twelve months,however,the monetary authorities have increased the money supply at a 12 percent annual rate.The expected inflation rate for the next period will be:

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Question 13

The modern view of the Phillips curve indicates that in the long run there

Accepted Answer

The modern view of the Phillips curve, based on empirical evidence, indicates that in the long run there is no trade-off between inflation and unemployment, as they are not related in the long run. This is known as the "vertical" Phillips curve.

Question 14

What are the two theories about how expectations are formed? Discuss each.

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Question 15

The integration of expectations into macroeconomic analysis indicates that

Accepted Answer

The integration of expectations into macroeconomic analysis suggests that once people adjust their expectations to a particular rate of inflation, that rate of inflation will no longer affect real output or unemployment in the economy. Thus, monetary and fiscal policy may not be as effective in stimulating these variables as previously thought. This implies that neither option A nor option B is correct. Additionally, option D is incorrect because the long-run Phillips curve suggests that higher rates of inflation will not lead to lower rates of unemployment, even in the long run.

Question 16

What are the macroeconomic policy implications of the rational expectations hypothesis? What should policy makers do and not do?

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Question 17

Explain the three lags that make it difficult to time changes in discretionary policy properly.

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Quiz 15: Stabilization Policy, output, and Employment

What will actual unemployment be (in relation to the natural rate)in each of the following cases? Use a graph of the modern Phillips curve in your answer. a.Decision makers underestimate inflation. b.Decision makers overestimate inflation. c.Decision makers correctly forecast inflation.