63. The main difference between new classical and new Keynesian theory is with respect to the assumption of
a.
how expectations are formed.
b.
how flexible wages and prices are.
c.
the slope of the SRAS curve.
d.
the slope of the AD curve.
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64. Under new Keynesian theory, a correctly anticipated decrease in aggregate demand will lead to __________ in Real
GDP and __________ in the price level.
a.
a decrease; a decrease
b.
no change; an increase
c.
no change; no change
d.
an increase; an increase
e.
an increase; no change
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65. Which theory of the business cycle emphasizes initiating changes in aggregate supply?
a.
the Friedman “fooling” theory
b.
the real business cycle theory
c.
the Keynesian theory
d.
the new classical theory
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66. The real business cycle theory holds that the business cycle
a.
originates as a result of factors affecting aggregate supply.
b.
originates as a result of factors affecting aggregate demand.
c.
is the result of correctly anticipated policies.
d.
is the result of incorrectly anticipated policies.
67. According to the real business cycle theory, business cycle contractions are generally caused by
a.
b.
c.
d.
e.
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68. In the real business cycle theory, business cycle contractions begin as a result of changes in
a.
aggregate GDP.
b.
aggregate spending.
c.
aggregate demand.
d.
aggregate consumption.
e.
long-run aggregate supply.
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69. Which of the following changes would not be considered a likely source of changes in Real GDP according to real
business cycle theory?
a.
a natural disaster
b.
a technological change
c.
a change in the price of an important input
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d.
a change in the money supply
e.
none of the above
70. In real business cycle theory, business cycle expansions begin as a result of changes in
a.
GDP.
b.
long-run aggregate supply.
c.
aggregate demand.
d.
consumption.
e.
investment demand.
b
Moderate
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71. Real business cycle theory would emphasize the ability of a beneficial supply shock to shift the __________ curve
rightward and __________ Real GDP.
a.
AD; lower
b.
AD; raise
c.
LRAS; lower
d.
LRAS; raise
1
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72. The original Phillips curve suggests a(n) __________ relationship between the rate of change in __________ and the
__________.
a.
direct; prices; unemployment rate
b.
inverse; money wage rates; unemployment rate
c.
inverse; prices; unemployment
d.
direct; money wage rates; money supply
e.
inverse; money wage rates; money supply
1
1
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73. Stagflation consists of
a.
high inflation and low unemployment.
b.
low inflation and high unemployment.
c.
high inflation and high unemployment.
d.
high unemployment and an economy in a deep recession.
e.
none of the above
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74. The Samuelson and Solow Phillips curve suggested a(n) __________ relationship between the rate of change in
__________ and the unemployment rate.
a.
direct; real wage rates
b.
inverse; money wage rates
c.
inverse; prices
d.
direct; prices
e.
none of the above
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75. If there is a stable downward-sloping Phillips curve, it follows that an economy can choose the combination of
a.
high unemployment and low inflation.
b.
low unemployment and high inflation.
c.
moderate unemployment and moderate inflation.
d.
low inflation and low unemployment.
e.
a, b, and c
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76. 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.
a.
the unemployment rate, price level
b.
Real GDP rises, unemployment rate
c.
nominal interest rate, real interest rate
d.
the unemployment rate, Real GDP level
e.
none of the above
b
1
Challenging
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77. Milton Friedman argued that as long as
a.
the unemployment rate is higher than the inflation rate, the economy is not in long-run equilibrium.
b.
Real GDP grows, the inflation rate will fall.
c.
the expected inflation rate is not equal to the actual inflation rate, the economy is not in long-run equilibrium.
d.
nominal wages rise, so do real wages.
e.
none of the above
1
Moderate
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78. 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
a.
decreasing.
b.
increasing.
c.
higher than it was in long-run equilibrium.
d.
equal to what it was in long-run equilibrium.
e.
There is not enough information to answer the question.
b
1
Moderate
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79. The expected inflation rate is equal to the actual inflation rate. According to the (Friedman) natural rate theory, the
economy is
a.
in a recessionary gap.
b.
in an inflationary gap.
c.
at a point on the short-run Phillips curve, but not on the long-run Phillips curve.
d.
biased toward producing a higher percentage of services than goods.
e.
producing Natural Real GDP.
80. According to Milton Friedman, the reason there are two Phillips curves is because
a.
the expected inflation rate is always higher than the actual inflation rate.
b.
wages are inflexible.
c.
prices are inflexible.
d.
the expected inflation rate does not instantaneously adjust to changes in the actual inflation rate.
e.
the expected inflation rate is equal to 1 minus the actual inflation rate.
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81. The Friedman natural rate theory is built upon
a.
rational expectations.
b.
adaptive expectations.
c.
flexible wages and prices.
d.
the assumption of one Phillips curve.
e.
b and c
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82. New classical economists build their theories upon
a.
adaptive expectations.
b.
inflexible wages and prices.
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c.
rational expectations.
d.
the assumption that it takes a long time for markets to achieve equilibrium values.
83. 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 __________.
a.
fall; rise
b.
rise; fall
c.
fall; remain unchanged
d.
rise; remain unchanged
e.
remain unchanged; remain unchanged
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84. 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.
a.
rise; rise; lower
b.
rise; fall; higher
c.
rise; fall; higher
d.
fall; rise; lower
e.
rise; rise; higher
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85. 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.
a.
rise; fall; higher
b.
rise; rise; higher
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c.
fall; rise; lower
d.
fall; rise; higher
e.
rise; rise; lower
86. 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.
a.
by more
b.
by less
c.
by the same amount
d.
faster
e.
slower
b
1
Moderate
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87. 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.
a.
correctly; adaptively; inflexible
b.
correctly; rationally; flexible
c.
incorrectly; adaptively; inflexible
d.
incorrectly; rationally; flexible
e.
correctly; rationally; inflexible
b
1
Challenging
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88. 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 __________.
a.
falls; falls; rises; fall; fall; less
b.
falls; rises; rises; fall; rise; more
c.
falls; rises; falls; fall; fall; less
b
1
Challenging
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d.
rises; rises; falls; fall; rise; more
e.
rises; falls; rises; fall; fall; more
Exhibit 16-4
89. 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:
a.
SRAS1 to SRAS2, then LRAS1 to LRAS2.
b.
AD1 to AD2, then LRAS1 to LRAS2.
c.
LRAS1 to LRAS2, then AD1 to AD2.
d.
LRAS1 to LRAS2, then SRAS1 to SRAS2.
e.
none of the above
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90. Refer to Exhibit 16-4. If LRAS1 shifts to LRAS2, and this causes AD1 to shift to AD2, economists would call this a
a.
rational expectations cycle.
b.
policy ineffectiveness proposition.
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c.
short run Phillips curve.
d.
real business cycle.
91. Two key assumptions of new Keynesian theory include:
a.
(1) people hold rational expectations, and (2) wages and prices are not completely flexible in the short run.
b.
(1) people hold adaptive expectations, and (2) wages and prices are inflexible.
c.
(1) people hold rational expectations, and (2) wages and prices are flexible.
d.
(1) people hold neither adaptive nor rational expectations and (2) prices are inflexible.
e.
none of the above
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92. 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.
a.
higher; lower
b.
lower; higher
c.
lower; lower
d.
higher; higher
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93. The economist who won the Nobel Prize in Economics in 1995, and whose name is closely connected with rational
expectations theory, is
a.
Robert Solow.
b.
Paul Samuelson.
c.
Milton Friedman.
d.
Robert Lucas.
e.
John Maynard Keynes.
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94. 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
a.
A. W. Phillips.
b.
Paul Samuelson.
c.
Milton Friedman.
d.
Robert Lucas.
e.
Thomas Sargent.
Moderate
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95. One implication of the policy ineffectiveness proposition (PIP) is that expansionary __________ policy is not
effective at raising __________.
a.
monetary; Real GDP
b.
monetary; the price level
c.
fiscal; the price level
d.
a and b
e.
a and c
Moderate
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96. According to real business cycle theorists, changes in Real GDP are the result of initial changes in
a.
aggregate demand.
b.
the money supply.
c.
the expected inflation rate.
d.
prices.
e.
none of the above
1
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1
Moderate
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Exhibit 16-5
97. Refer to Exhibit 16-5. If the economy continually moves between points 1, 2, and 3, it follows that
a.
this economy has not experienced stagflation.
b.
a tradeoff exists between inflation and unemployment.
c.
when inflation is higher, unemployment is lower.
d.
a and b
e.
a, b, and c
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98. Refer to Exhibit 16-5. If the economy is at point 3, and the natural unemployment rate exists at points 1, 4, and 5, it
follows that
a.
Real GDP is greater than Natural Real GDP.
b.
Real GDP is less than Natural Real GDP.
c.
Real GDP is the same as Natural Real GDP.
d.
the economy is in a recessionary gap.
e.
b and d
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99. Refer to Exhibit 16-5. If the economy is at point 6, and the natural unemployment rate exists at points 1, 4, and 5, it
follows that
a.
Real GDP is greater than Natural Real GDP.
b.
Real GDP is less than Natural Real GDP.
c.
Real GDP is the same as Natural Real GDP.
d.
the economy is in a recessionary gap.
e.
b and d
Exhibit 16-6
100. Refer to Exhibit 16-6. The economy is initially at point B. There is an unanticipated increase in aggregate demand,
prices and wages are flexible, the economy is self-regulating, and people hold adaptive expectations. In the short run the
economy will move to point __________ and in the long run the economy will be at point __________.
a.
F, C
b.
F, D
c.
E, B
d.
E, C
e.
E, A
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101. Refer to Exhibit 16-6. The economy is initially in long-run equilibrium at point A. There is a correctly anticipated
e
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increase in aggregate demand, prices and wages are flexible, the economy is self-regulating, and people hold rational
expectations. The economy will move to point
a.
F.
b.
C.
c.
B.
d.
B or C.
e.
This exhibit does not show the point the economy would move to.
102. The original (1958) Phillips curve differed from the Samuelson-Solow Phillips curve in that
a.
the former was based on American data, while the latter was based on British data.
b.
the former measured price inflation rates, while the latter used wage inflation rates.
c.
the former was based on British data, while the latter was based on American data.
d.
the former measured nominal GDP, while the latter used Real GDP.
e.
a and b
c
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103. In which of the following economic theories is it possible for an increase in the money supply to lead to a decrease in
Real GDP in the short run?
a.
Keynesian theory
b.
Monetarist theory
c.
New classical theory
d.
a and b
e.
a and c
c
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104. The concept of rational expectations first appeared on the economic scene in _______, but it wasn’t until the
_____________ that it received more significant notice in the economics profession.
a.
1931; early 1970s
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b.
1961; early 1970s
c.
1981; early 1990s
d.
1991; early 2000s
e.
1921; early 1980s
105. A person’s real wage will fall if the
a.
nominal wage falls.
b.
price level rises.
c.
nominal wage rises.
d.
price level falls.
e.
a and b
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106. As the price level falls, real wage ____________and people choose to work ___________.
a.
rises; more
b.
rises; less
c.
falls; more
d.
falls; less
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107. As the price level rises, real wage ____________and people choose to work ___________.
a.
rises; more
b.
rises; less
c.
falls; more
d.
falls; less
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