Question 1

The new classical macroeconomists believe that people should form expectations by

Accepted Answer

New classical macroeconomists believe that people should form expectations by actually seeking to forecast the future, using all available information and data. This is in contrast to assumptions used by other schools of thought, such as the Keynesian economists, who may assume that the future will be similar to the past or present.

Question 2

If relevant information can be obtained at no cost, people are ________ when they fail to use all available information given that there are usually ________ to making a wrong forecast.

Accepted Answer

This statement suggests that people have access to relevant information at no cost, yet fail to use it to make accurate forecasts. Therefore, it is not rational for people to not use all available information, even though there may be costs associated with acquiring and processing additional information. Hence, the correct choice is (C) not behaving rationally; costs.

Question 3

According to the Lucas supply function, when the substitution effect dominates the income effect, workers who experience a ________ price surprise will work ________ hours.

Accepted Answer

According to the Lucas supply function, when the substitution effect dominates the income effect, workers will work more hours in response to a positive price surprise. A positive price surprise means that the wage rate increases, which makes working more attractive compared to leisure. This induces workers to work more, resulting in an upward shift of the labor supply curve.

Question 4

The equation Y = f(P - P^e) represents the

Accepted Answer

The equation Y = f(P - P^e) represents the Lucas supply function, which describes how output (Y) is affected by the difference between actual prices (P) and expected prices (P^e).

Question 5

The microeconomic view of the expectations of inflation are based on the assumption that

Accepted Answer

The microeconomic view of inflation expectations assumes that individuals are rational and forward-looking, meaning they consider past, current, and future economic conditions when making decisions about spending and saving. This assumption is fundamental to the theory of rational expectations, which is a cornerstone of microeconomics. The other options, including B, C, and D, do not accurately reflect this assumption.

Question 6

According to the Lucas supply function, if a firm mistakenly perceives that all prices are going ________ because its own output price is going ________, it will ________ its production level.

Accepted Answer

The answer of According to the Lucas supply function, if...

Question 7

New classical macroeconomics developed from the

Accepted Answer

New classical macroeconomics emerged as a response to the theoretical and empirical critiques of traditional Keynesian economics, focusing on rational expectations and market clearing.

Question 8

According to the Lucas supply function, if the expected price level is smaller than the actual price level,

Accepted Answer

According to the Lucas supply function, if the expected price level is smaller than the actual price level, firms perceive the price of their product to have increased relative to the general price level. This incentivizes them to increase production, leading to an increase in real output.

Question 9

With the Lucas supply function, a price ________ means actual price is either greater than or lower than expected price.

Accepted Answer

The Lucas supply function assumes that firms have rational expectations and produce output based on their expected price. Therefore, if the actual price is different from what was expected, it results in a surprise or an unexpected outcome. Therefore, the best choice is D) surprise.

Question 10

According to the rational expectations hypothesis, unpredictable shocks explain the existence of

Accepted Answer

According to the rational expectations hypothesis, individuals form their expectations about future economic conditions based on all available information, including past events and current policies. Therefore, unpredictable shocks, such as changes in technology, natural disasters, or sudden shifts in consumer preferences, can lead to unexpected changes in economic conditions, which may in turn lead to fluctuations in employment levels. So, rational expectations can explain the existence of unemployment.

Question 11

People are said to have ________ if they use all available information in forming their expectations.

Accepted Answer

Rational expectations theory states that people make decisions based on all available information and use it to form their expectations about future events. This theory is often used in economics and finance to analyze how investors and market participants make decisions based on current information and past experiences. Rational expectations assume that individuals are rational and use all available information to make their decisions, leading to more accurate predictions and outcomes. Option B) insider information is illegal and unethical and can lead to market manipulation. Option C) unbiased prognostication is similar to rational expectations but not as precise in terms of using all available information. Option D) psychic insight is not a valid or reliable method for forming expectations in the real world.

Question 12

Assume that the income effect dominates the substitution effect. When workers experience a ________ price surprise, they ________ perceive that their real wage rate has ________, which leads them to work fewer hours.

Accepted Answer

When workers experience a positive price surprise, they incorrectly perceive that their real wage rate has risen, leading them to work fewer hours due to the dominant income effect.

Question 13

According to the Lucas supply function, when the income effect dominates the substitution effect, workers who experience a ________ price surprise will work ________ hours.

Accepted Answer

When the income effect dominates the substitution effect, workers will work fewer hours when they experience a positive price surprise (an increase in the wage rate). This is because the increase in income from the higher wage rate allows workers to meet their desired level of consumption with less work, reducing the incentive to work more hours.

Question 14

The ________ hypothesis suggests that errors in forecasting future inflation rates are due to random, unpredictable events.

Accepted Answer

The rational-expectations hypothesis suggests that although people may not predict the future perfectly, their errors are random and not systematically biased. This means that on average, people's forecasts of economic variables, like inflation rates, are correct, and deviations from these forecasts are due to random, unpredictable events.

Question 15

According to the rational expectation hypothesis, unpredictable shocks may cause

Accepted Answer

The rational expectation hypothesis suggests that individuals form expectations about the future based on all available information, including the understanding of economic policies and theories. While unpredictable shocks can cause temporary disequilibrium in various markets, including the labor market, the hypothesis implies that markets adjust as individuals update their expectations with new information, thus not necessarily leading to uncontrollable inflation, long-lasting recession, or sustained levels of unemployment.

Question 16

According to the ________ hypothesis, unemployment may occur, and if it does, it will be temporary.

Accepted Answer

The rational expectations hypothesis suggests that individuals use all available information to make forecasts about the future, including the state of unemployment. According to this hypothesis, any unemployment that occurs would be due to temporary adjustments, as people's expectations adjust to new information.

Question 17

According to the rational expectations theory, if all firms have rational expectations and wages and prices are flexible, disequilibrium in a market

Accepted Answer

According to the rational expectations theory, if all firms have rational expectations and wages and prices are flexible, disequilibrium in a market will only be temporary. This is because any market disturbances or shocks will be anticipated by firms and will result in them adjusting their prices and production levels accordingly in order to restore equilibrium.

Question 18

Those who believe in the rational expectations hypothesis advocate ________ policy intervention.

Accepted Answer

Those who believe in the rational expectations hypothesis argue that monetary or fiscal policy intervention is unnecessary or even harmful as individuals in the economy will adjust their behavior accordingly based on their rational expectations of future conditions.

Question 19

The hypothesis that people know the "true model" of the economy and that they use this model to form their expectations of the future is the

Accepted Answer

The hypothesis that people have rational expectations and use all available information, including the "true model" of the economy, to form their expectations is the rational-expectations hypothesis. This theory was developed by economist Robert Lucas and is widely used in macroeconomic analysis. The other options (A, B, and D) do not address this specific hypothesis.

Question 20

If firms have ________ and if they set prices and wages on this basis, then prices and wages will, on average, be set at market-clearing levels.

Accepted Answer

If firms have rational expectations, they will make decisions based on what they believe will happen in the market. This will include taking into account supply and demand factors in order to determine prices and wages. Rational expectations should result in prices and wages being set at market-clearing levels, as firms will not want to overprice their goods and services and risk losing customers, or underprice them and miss out on potential profits.

Quiz 17: Alternative Views in Macroeconomics

The new classical macroeconomists believe that people should form expectations by

If relevant information can be obtained at no cost, people are when they fail to use all available information given that there are usually to making a wrong forecast.

According to the Lucas supply function, when the substitution effect dominates the income effect, workers who experience a price surprise will work hours.

The equation Y = f(P - P^e) represents the

The microeconomic view of the expectations of inflation are based on the assumption that

According to the Lucas supply function, if a firm mistakenly perceives that all prices are going because its own output price is going , it will its production level.

New classical macroeconomics developed from the

According to the Lucas supply function, if the expected price level is smaller than the actual price level,

With the Lucas supply function, a price ________ means actual price is either greater than or lower than expected price.

According to the rational expectations hypothesis, unpredictable shocks explain the existence of

People are said to have ________ if they use all available information in forming their expectations.

Assume that the income effect dominates the substitution effect. When workers experience a price surprise, they perceive that their real wage rate has , which leads them to work fewer hours.

According to the Lucas supply function, when the income effect dominates the substitution effect, workers who experience a price surprise will work hours.

The ________ hypothesis suggests that errors in forecasting future inflation rates are due to random, unpredictable events.

According to the rational expectation hypothesis, unpredictable shocks may cause

According to the ________ hypothesis, unemployment may occur, and if it does, it will be temporary.

According to the rational expectations theory, if all firms have rational expectations and wages and prices are flexible, disequilibrium in a market

Those who believe in the rational expectations hypothesis advocate ________ policy intervention.

The hypothesis that people know the "true model" of the economy and that they use this model to form their expectations of the future is the

If firms have ________ and if they set prices and wages on this basis, then prices and wages will, on average, be set at market-clearing levels.

Quiz 17: Alternative Views in Macroeconomics

The new classical macroeconomists believe that people should form expectations by

If relevant information can be obtained at no cost, people are ________ when they fail to use all available information given that there are usually ________ to making a wrong forecast.

According to the Lucas supply function, when the substitution effect dominates the income effect, workers who experience a ________ price surprise will work ________ hours.

The equation Y = f(P - Pe) represents the

The microeconomic view of the expectations of inflation are based on the assumption that

According to the Lucas supply function, if a firm mistakenly perceives that all prices are going ________ because its own output price is going ________, it will ________ its production level.

New classical macroeconomics developed from the

According to the Lucas supply function, if the expected price level is smaller than the actual price level,

With the Lucas supply function, a price ________ means actual price is either greater than or lower than expected price.

According to the rational expectations hypothesis, unpredictable shocks explain the existence of

People are said to have ________ if they use all available information in forming their expectations.

Assume that the income effect dominates the substitution effect. When workers experience a ________ price surprise, they ________ perceive that their real wage rate has ________, which leads them to work fewer hours.

According to the Lucas supply function, when the income effect dominates the substitution effect, workers who experience a ________ price surprise will work ________ hours.

The ________ hypothesis suggests that errors in forecasting future inflation rates are due to random, unpredictable events.

According to the rational expectation hypothesis, unpredictable shocks may cause

According to the ________ hypothesis, unemployment may occur, and if it does, it will be temporary.

According to the rational expectations theory, if all firms have rational expectations and wages and prices are flexible, disequilibrium in a market

Those who believe in the rational expectations hypothesis advocate ________ policy intervention.

The hypothesis that people know the "true model" of the economy and that they use this model to form their expectations of the future is the

If firms have ________ and if they set prices and wages on this basis, then prices and wages will, on average, be set at market-clearing levels.

If relevant information can be obtained at no cost, people are when they fail to use all available information given that there are usually to making a wrong forecast.

According to the Lucas supply function, when the substitution effect dominates the income effect, workers who experience a price surprise will work hours.

The equation Y = f(P - P^e) represents the

According to the Lucas supply function, if a firm mistakenly perceives that all prices are going because its own output price is going , it will its production level.

Assume that the income effect dominates the substitution effect. When workers experience a price surprise, they perceive that their real wage rate has , which leads them to work fewer hours.

According to the Lucas supply function, when the income effect dominates the substitution effect, workers who experience a price surprise will work hours.