Question 1

If stagflation is present the short-run Phillips curve is vertical.

Accepted Answer

Stagflation is characterized by high inflation and high unemployment, which suggests that the short-run Phillips curve is not vertical. A vertical Phillips curve implies that there is no trade-off between inflation and unemployment, which contradicts the conditions of stagflation.

Question 2

New Keynesian theory differs from new classical theory in that New Keynesian theory assumes that wages and prices are not completely flexible in the short-run,while fully flexible wages and prices are an assumption of new classical theory.

Accepted Answer

New Keynesian theory assumes that wages and prices are not completely flexible in the short-run, while new classical theory assumes fully flexible wages and prices.

Question 3

The original Phillips curve depicted an inverse relationship between wage inflation and unemployment.

Accepted Answer

The original Phillips curve, proposed by economist A.W. Phillips in 1958, showed that there was an inverse relationship between wage inflation and unemployment- meaning that as unemployment decreased, wage inflation increased.

Question 4

Exhibit 16-10 
-Refer to Exhibit 16-10.Assume that the starting point is point 1.Suppose that the government implements expansionary fiscal policy that raises aggregate demand.Which of the following best goes with the diagram shown?

Accepted Answer

The answer of Exhibit 16-10 
-Refer to Exhibit 16-10.Assume that...

Question 5

New classical economists believe that monetary and fiscal policies are never effective.

Accepted Answer

New classical economists believe that monetary and fiscal policies can be effective in the short run but argue that in the long run, these policies are neutralized by adjustments in expectations and behavior, making them ineffective in changing real output or employment.

Question 6

Suppose that the Fed expects to increase the money supply by $49 billion,but economic agents expect that the increase will be closer to $75 billion.Using rational expectations theory,the result will be ______________ Real GDP and a ________________ price level.

Accepted Answer

According to rational expectations theory, economic agents will anticipate the Fed's actions and adjust their behavior accordingly. In this case, economic agents expect the Fed to increase the money supply by $75 billion, which is more than the Fed's actual increase of $49 billion. This will lead to an increase in aggregate demand, which will in turn lead to higher real GDP and a higher price level.

Question 7

An unanticipated decrease in aggregate demand will cause an upward shift in the short-run Phillips curve.

Accepted Answer

An unanticipated decrease in aggregate demand will cause a downward shift in the short-run Phillips curve, not an upward shift. This is because the decrease in aggregate demand leads to a decrease in prices, causing inflation to fall in the short run. As a result, the Phillips curve shifts down, reflecting the lower level of inflation associated with any given level of unemployment.

Question 8

The real business cycle theory focuses on the impact that changes in long-run aggregate supply will have on the business cycle.

Accepted Answer

The real business cycle theory emphasizes the role of real shocks to the economy such as changes in productivity, technology, or capital stock, which affect the long-run aggregate supply and can cause fluctuations in output and employment over the business cycle.

Question 9

According to Milton Friedman,there are two Phillips curves,a short-run one and a long-run one.

Accepted Answer

Milton Friedman proposed the theory of the natural rate of unemployment, which implies that there are two Phillips curves - a short-run one that shows a trade-off between inflation and unemployment, and a long-run one that is vertical and indicates that in the long run, the economy will return to its natural rate of unemployment independent of inflation.

Question 10

The terms rational expectations and adaptive expectations are two different names for the same concept.

Accepted Answer

Rational expectations assume that individuals form their expectations based on all available information and economic theory. Adaptive expectations assume that individuals adjust their expectations based on past events and experiences. These are two distinct concepts.

Question 11

Exhibit 16-11 
-Refer to Exhibit 16-11.Assume that the starting point is point 1.Suppose that there is a supply-side change capable of reducing the capacity of the economy to produce.Which of the following best goes with the diagram shown?

Accepted Answer

The diagram shown represents the production possibilities frontier (PPF) which illustrates the maximum combinations of two goods that an economy can produce given its resources and technology. A reduction in the capacity of the economy to produce would shift the PPF inward, or to the left, indicating a decrease in the production capacity of both goods. This aligns with the assumption of real business cycle theory, which posits that changes in productivity and technology are the main drivers of fluctuations in output and employment. None of the other theories or propositions mentioned in the answer choices directly account for a supply-side change and its impact on the PPF.

Question 12

According to new classical theory,if policy is correctly anticipated,expectations are formed rationally,and wages and prices are fully flexible,then an increase in aggregate demand will change Real GDP,but not the price level.

Accepted Answer

According to new classical theory, if policy is correctly anticipated, expectations are formed rationally, and wages and prices are fully flexible, then an increase in aggregate demand will not change Real GDP or the price level, as markets will adjust immediately to maintain equilibrium. Therefore, an increase in aggregate demand will not have any impact on the economy according to new classical theory.

Question 13

Which of the following assumptions is held by both the classical view and the new classical view?

Accepted Answer

The answer of Which of the following assumptions is held...

Question 14

Exhibit 16-9 
-Refer to Exhibit 16-9.Assume that the starting point is point 1.Suppose that the government implements expansionary fiscal policy that raises aggregate demand.Which of the following best goes with the diagram shown?

Accepted Answer

With expansionary fiscal policy, aggregate demand increases causing the AD curve to shift rightward from AD1 to AD2. In the New Classical theory, if policy is incorrectly anticipated, the bias is upward, causing output to increase more than expected.

Question 15

According to Friedman,in which of the following situations is the economy in long-run equilibrium?

Accepted Answer

The answer of According to Friedman,in which of the following...

Question 16

As long as some people anticipate policy,the economic consequences may be the same as if all persons do so.

Accepted Answer

Anticipation of policy by even a portion of the population can have overall economic consequences, as their behaviors and decisions may be influenced by potential changes in policy, leading to an impact on the economy.

Question 17

Rational expectations are based on the past alone,while adaptive expectations are based on the past,the present,and the future.

Accepted Answer

Rational expectations are based on all available information, including past, present, and expected future events. Adaptive expectations, on the other hand, rely heavily on past experiences but may also consider present and future information to adjust their expectations.

Question 18

The policy ineffectiveness proposition (PIP)argument states that under certain circumstances,neither expansionary demand-side fiscal policy nor expansionary monetary policy is effective at achieving macroeconomic goals.

Accepted Answer

The policy ineffectiveness proposition (PIP) argument is a widely debated idea in macroeconomics that suggests that under certain circumstances, expansionary demand-side fiscal policy or expansionary monetary policy cannot achieve macroeconomic goals such as increasing employment and stimulating economic growth. Therefore, option A is correct.

Question 19

Real business cycle theory emphasizes that an adverse supply shock will shift the LRAS curve leftward and cause a decline in Real GDP.

Accepted Answer

Real business cycle theory posits that fluctuations in output and employment are primarily due to changes in technology, productivity, and resource availability. Thus, an adverse supply shock, such as a decrease in productivity or an increase in input costs, would shift the long-run aggregate supply (LRAS) curve leftward, leading to a decrease in potential output or real GDP.

Question 20

The Friedman natural rate theory is based on rational expectations and is also called the new classical theory.

Accepted Answer

The Friedman natural rate theory is based on the concept that there is a natural rate of unemployment in the economy, but it does not rely on rational expectations. The theory of rational expectations is a separate concept that was later integrated into macroeconomic models by the New Classical economists.

Quiz 16: Expectations Theory and the Economy