Question 1

The economy is in long-run equilibrium when there is an incorrectly anticipated increase in aggregate demand brought about by expansionary monetary policy.Specifically,aggregate demand increases by less than people anticipate (bias upward).According to new classical theory,the price level will __________ and Real GDP will __________ in the short run.In the long run,the price level will be __________ than it was before aggregate demand increased.

Accepted Answer

According to the new classical theory, in the short run, prices will rise (due to the incorrectly anticipated increase in aggregate demand) but Real GDP will fall (due to market adjustments). In the long run, prices will be higher than they were before aggregate demand increased, but Real GDP will return to its original level (known as the natural rate of output), resulting in a fall in price level and higher output. Choice C fits this scenario.

Question 2

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.According to new classical theory,the price level will __________ and Real GDP will __________.

Accepted Answer

According to new classical theory, a correctly anticipated increase in aggregate demand will lead to an increase in the price level and no change in Real GDP. This is because firms will increase production in response to the increase in demand, but will eventually face higher input costs due to the higher price level. This leads to an increase in output prices, but no change in Real GDP.

Question 3

According to new classical economists,when monetary and fiscal policies are __________ anticipated,people form their expectations __________,and wages and prices are __________,the policy ineffectiveness proposition (PIP)results.

Accepted Answer

New classical economists argue that when monetary and fiscal policies are correctly anticipated, people form their expectations rationally, and if wages and prices are flexible, the policy ineffectiveness proposition (PIP) results. This means that anticipated policy changes will have no real effects on output or employment because individuals adjust their behavior in anticipation of these changes.

Question 4

New classical economists build their theories upon

Accepted Answer

New classical economists build their theories upon rational expectations, which means that they assume that individuals make decisions based on all available information and that they anticipate how markets will react to changes. This assumption is different from adaptive expectations, where individuals base their expectations on past experiences, and it is a key feature of the new classical approach. Inflexible wages and prices (B) are also a feature of the new classical model, but they are not as central as rational expectations. The assumption that it takes a long time for markets to achieve equilibrium values (D) is more characteristic of the old classical approach, which emphasized the importance of supply-side factors and long-run equilibrium.

Question 5

One implication of the policy ineffectiveness proposition (PIP)is that expansionary __________ policy is not effective at raising __________.

Accepted Answer

The answer of One implication of the policy ineffectiveness proposition...

Question 6

The economy is in long-run equilibrium when there is an incorrectly anticipated increase in aggregate demand brought about by expansionary monetary policy.Specifically,aggregate demand increases by more than people anticipate (bias downward).According to new classical theory,the price level will __________ and Real GDP will __________ in the short run.In the long run,the price level will be __________ than it was before aggregate demand increased.

Accepted Answer

In the short run, an unanticipated increase in aggregate demand due to expansionary monetary policy will cause both the price level and Real GDP to rise. In the long run, the price level will be higher than it was before the increase in aggregate demand, but Real GDP will return to its long-run potential level.

Question 7

The economy is in long-run equilibrium when government unexpectedly increases aggregate demand.The expected inflation rate is slow to adjust to the higher (actual)inflation rate.If follows that in the short run,according to the Friedman natural rate theory,__________ rises and the __________ falls.

Accepted Answer

According to the Friedman natural rate theory, in the short run, if the actual inflation rate is higher than the expected inflation rate due to an unexpected increase in aggregate demand, Real GDP rises and the unemployment rate falls. This is because the unexpected increase in inflation temporarily lowers real wages, encouraging firms to hire more workers and produce more, leading to a decrease in unemployment and an increase in Real GDP.

Question 8

The economist who won the Nobel Prize in Economics in 1995,and whose name is closely connected with rational expectations theory,is

Accepted Answer

The economist who won the Nobel Prize in Economics in 1995 and who is closely associated with rational expectations theory is Robert Lucas. He is known for his contributions to the development of new classical macroeconomics, especially the concept of rational expectations, which emphasizes the importance of expectations in shaping economic performance.

Question 9

The economy was in long-run equilibrium when aggregate demand increased.At this point in time,the expected inflation has started to adjust to the new higher actual inflation rate.According to the (Friedman)natural rate theory,this means the unemployment rate in the economy must currently be

Accepted Answer

According to the natural rate theory, when actual inflation exceeds expected inflation, the unemployment rate must increase above the natural rate to restore long-run equilibrium. Therefore, with the unexpected increase in aggregate demand causing actual inflation to surpass expected inflation, the unemployment rate must currently be increasing above its natural rate.

Question 10

The economist who,in his presidential address to the American Economic Association in 1967,attacked the idea of a permanent downward-sloping Phillips curve was

Accepted Answer

Milton Friedman delivered the presidential address to the American Economic Association in 1967 where he famously attacked the idea of a permanent downward-sloping Phillips curve. A.W. Phillips was the economist who first described the inverse relationship between unemployment and inflation, and Paul Samuelson, Robert Lucas, and Thomas Sargent are all well-known economists, but not specifically associated with challenging the Phillips curve in the way Friedman did.

Question 11

According to Milton Friedman,the reason there are two Phillips curves is because

Accepted Answer

According to Milton Friedman, the existence of two Phillips curves is due to the lag in the adjustment of the expected inflation rate to changes in the actual inflation rate. In other words, people and firms do not immediately update their expectations of inflation when there is a change in the actual inflation rate, leading to a short-run Phillips curve and a long-run Phillips curve. The short-run Phillips curve shows the inverse relationship between inflation and unemployment when there is a lag in expectations, while the long-run Phillips curve is a vertical line representing the natural rate of unemployment, where inflation is determined only by expected monetary policy. Inflexibility of wages or prices is also a factor, but the primary reason for the two Phillips curves is the lag in expected inflation adjustment.

Question 12

-Refer to Exhibit 16-4.If LRAS₁ shifts to LRAS₂,and this causes AD₁ to shift to AD₂,economists would call this a

Accepted Answer

A shift in the long-run aggregate supply (LRAS) and the aggregate demand (AD) that leads to changes in the economic output without specific reference to inflation or unemployment adjustments typically characterizes a real business cycle. This concept focuses on real (inflation-adjusted) economic variables and their fluctuations over time, often attributed to changes in technology, productivity, or external shocks, rather than monetary or fiscal policy effects.

Question 13

Milton Friedman argued that as long as

Accepted Answer

Friedman argued that the economy is in long-run equilibrium when the expected inflation rate is equal to the actual inflation rate, and any deviation from this equilibrium indicates a need for adjustment.

Question 14

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.In new Keynesian theory,the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

Accepted Answer

In new Keynesian theory, prices are sticky in the short run due to factors like menu costs and contracts, so the price level will rise by less compared to new classical theory, where prices are more flexible.

Question 15

The expected inflation rate is equal to the actual inflation rate.According to the (Friedman)natural rate theory,the economy is

Accepted Answer

According to the natural rate theory, when the economy is producing Natural Real GDP, the expected inflation rate is equal to the actual inflation rate. Therefore, the correct choice is E.

Question 16

According to real business cycle theorists,if the long-run aggregate supply (LRAS)curve shifts to the left,Real GDP __________,the price level __________,the demand for labor __________,money wages __________,real wages __________,and workers choose to work __________.

Accepted Answer

According to real business cycle theorists, a leftward shift in the LRAS curve indicates a decrease in potential output due to factors such as a decrease in productivity or a decrease in the availability of resources. Therefore, real GDP falls. As the LRAS curve shifts left, the price level rises, resulting in a decrease in the demand for labor. As a result, money wages fall due to the excess supply of labor. Even though money wages fall, the decrease in prices is proportionally larger, resulting in a fall in real wages. In response, workers choose to work less. Therefore, the correct answer is C.

Question 17

-Refer to Exhibit 16-4.The economy is initially at point A,in long run equilibrium.A real business cycle would be represented by the following sequence of curve shifts:

Accepted Answer

Real business cycles are characterized by shifts in the long-run aggregate supply (LRAS) due to real factors such as technology or resources. This is followed by adjustments in aggregate demand (AD) to the new level of potential output. Option C correctly describes this sequence.

Question 18

The Friedman natural rate theory is built upon

Accepted Answer

The Friedman natural rate theory is built upon adaptive expectations (B) and the concept of flexible wages and prices (C), which together argue against the traditional Phillips curve's implication of a stable trade-off between inflation and unemployment.

Question 19

The economy is initially in long-run equilibrium.Expectations are adaptive,prices and wages are flexible,and there is an unanticipated increase in aggregate demand.In the short run,the price level will be __________ than it was in long-run equilibrium and Real GDP will be __________ than it was in long-run equilibrium.

Accepted Answer

In the short run, an unanticipated increase in aggregate demand leads to higher prices due to the flexible nature of prices and wages, and higher Real GDP as the economy adjusts to the increased demand before returning to long-run equilibrium.

Question 20

Two key assumptions of new Keynesian theory include:

Accepted Answer

New Keynesian theory assumes that people hold rational expectations, meaning they use all available information to form their expectations about the future. Additionally, the theory assumes that wages and prices are not completely flexible in the short run, due to factors such as menu costs and the existence of nominal rigidities.

Quiz 16: Interest,rent,and Profit

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.According to new classical theory,the price level will and Real GDP will .

According to new classical economists,when monetary and fiscal policies are anticipated,people form their expectations ,and wages and prices are __,the policy ineffectiveness proposition (PIP) results.

New classical economists build their theories upon

One implication of the policy ineffectiveness proposition (PIP) is that expansionary policy is not effective at raising .

The economy is in long-run equilibrium when government unexpectedly increases aggregate demand.The expected inflation rate is slow to adjust to the higher (actual) inflation rate.If follows that in the short run,according to the Friedman natural rate theory, rises and the falls.

The economist who won the Nobel Prize in Economics in 1995,and whose name is closely connected with rational expectations theory,is

The economy was in long-run equilibrium when aggregate demand increased.At this point in time,the expected inflation has started to adjust to the new higher actual inflation rate.According to the (Friedman) natural rate theory,this means the unemployment rate in the economy must currently be

The economist who,in his presidential address to the American Economic Association in 1967,attacked the idea of a permanent downward-sloping Phillips curve was

According to Milton Friedman,the reason there are two Phillips curves is because

-Refer to Exhibit 16-4.If LRAS₁ shifts to LRAS₂,and this causes AD₁ to shift to AD₂,economists would call this a

Milton Friedman argued that as long as

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.In new Keynesian theory,the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

The expected inflation rate is equal to the actual inflation rate.According to the (Friedman) natural rate theory,the economy is

According to real business cycle theorists,if the long-run aggregate supply (LRAS) curve shifts to the left,Real GDP ,the price level ,the demand for labor ,money wages ,real wages ,and workers choose to work .

-Refer to Exhibit 16-4.The economy is initially at point A,in long run equilibrium.A real business cycle would be represented by the following sequence of curve shifts:

The Friedman natural rate theory is built upon

The economy is initially in long-run equilibrium.Expectations are adaptive,prices and wages are flexible,and there is an unanticipated increase in aggregate demand.In the short run,the price level will be than it was in long-run equilibrium and Real GDP will be than it was in long-run equilibrium.

Two key assumptions of new Keynesian theory include:

Quiz 16: Interest,rent,and Profit

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.According to new classical theory,the price level will __________ and Real GDP will __________.

According to new classical economists,when monetary and fiscal policies are __________ anticipated,people form their expectations __________,and wages and prices are __________,the policy ineffectiveness proposition (PIP) results.

New classical economists build their theories upon

One implication of the policy ineffectiveness proposition (PIP) is that expansionary __________ policy is not effective at raising __________.

The economist who won the Nobel Prize in Economics in 1995,and whose name is closely connected with rational expectations theory,is

The economy was in long-run equilibrium when aggregate demand increased.At this point in time,the expected inflation has started to adjust to the new higher actual inflation rate.According to the (Friedman) natural rate theory,this means the unemployment rate in the economy must currently be

The economist who,in his presidential address to the American Economic Association in 1967,attacked the idea of a permanent downward-sloping Phillips curve was

According to Milton Friedman,the reason there are two Phillips curves is because

-Refer to Exhibit 16-4.If LRAS1 shifts to LRAS2,and this causes AD1 to shift to AD2,economists would call this a

Milton Friedman argued that as long as

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.In new Keynesian theory,the price level will rise __________ in the short run than it is predicted to rise in new classical theory.

The expected inflation rate is equal to the actual inflation rate.According to the (Friedman) natural rate theory,the economy is

According to real business cycle theorists,if the long-run aggregate supply (LRAS) curve shifts to the left,Real GDP __________,the price level __________,the demand for labor __________,money wages __________,real wages __________,and workers choose to work __________.

-Refer to Exhibit 16-4.The economy is initially at point A,in long run equilibrium.A real business cycle would be represented by the following sequence of curve shifts:

The Friedman natural rate theory is built upon

Two key assumptions of new Keynesian theory include:

The economy is in long-run equilibrium when there is a correctly anticipated increase in aggregate demand.According to new classical theory,the price level will and Real GDP will .

According to new classical economists,when monetary and fiscal policies are anticipated,people form their expectations ,and wages and prices are __,the policy ineffectiveness proposition (PIP) results.

One implication of the policy ineffectiveness proposition (PIP) is that expansionary policy is not effective at raising .

-Refer to Exhibit 16-4.If LRAS₁ shifts to LRAS₂,and this causes AD₁ to shift to AD₂,economists would call this a

According to real business cycle theorists,if the long-run aggregate supply (LRAS) curve shifts to the left,Real GDP ,the price level ,the demand for labor ,money wages ,real wages ,and workers choose to work .