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108. A rise in the expected price level leads to an expectation that real wages will ____________, which will cause people
to work __________, shifting the SRAS curve _______________.
a.
rise; more; rightward
b.
rise; less; leftward
c.
fall; more; rightward
d.
fall; less; leftward
109. A fall in the expected price level leads to an expectation that real wages will ____________, which will cause people
to work __________, shifting the SRAS curve _______________.
a.
rise; more; rightward
b.
rise; less; leftward
c.
fall; more; rightward
d.
fall; less; leftward
110. Suppose that the government implements expansionary fiscal policy that raises aggregate demand, but individuals
incorrectly anticipate the policy measure (bias upward). According to new classical theory, in the short run the price level
would ____________ and Real GDP would ______________. In the long run, new classical theory would predict that the
price level would ______________ compared to its original long-run equilibrium level and that Real GDP would
_____________.
a.
rise; decline; rise; remain unchanged
b.
fall; rise; rise; remain unchanged
c.
rise; decline; remain unchanged; rise
d.
fall; rise; remain unchanged; rise
111. Suppose that the Fed implements expansionary monetary policy that raises aggregate demand, but individuals
incorrectly anticipate the policy measure (bias downward). According to new classical theory, in the short run the price
level would ____________ and Real GDP would ______________. In the long run, new classical theory would predict
that the price level would ___________compared to its original long-run equilibrium level and that Real GDP would
____________.
a.
rise; decline; rise; remain unchanged
b.
rise; rise; rise; remain unchanged
c.
rise; decline; remain unchanged; rise
d.
fall; rise; remain unchanged; rise
112. Suppose that the government implements expansionary fiscal policy that raises aggregate demand, but the policy is
unanticipated. According to new classical theory, in the short run the price level would ____________ and Real GDP
would ______________. In the long run, new classical theory would predict that the price level would ______________
compared to its original long-run equilibrium level and that Real GDP would ____________.
a.
rise; decline; rise; remain unchanged
b.
rise; rise; rise; remain unchanged
c.
rise; decline; remain unchanged; rise
d.
fall; rise; remain unchanged; rise
Exhibit 16-7
113. Refer to Exhibit 16-7. Assume that the starting point is point 1. Suppose that the Fed implements expansionary
monetary policy that raises aggregate demand. Which of the following best goes with the diagram shown?
a.
New classical theory with policy incorrectly anticipated, bias downward
b.
New classical theory with policy incorrectly anticipated, bias upward
c.
Real business cycle theory
d.
New classical theory with policy unanticipated
e.
Policy ineffectiveness proposition (PIP)
Exhibit 16-8
114. Refer to Exhibit 16-8. Assume that the starting point is point 1. Suppose that the Fed implements expansionary
monetary policy that raises aggregate demand. Which of the following best goes with the diagram shown?
a.
New classical theory with policy incorrectly anticipated, bias downward
b.
New classical theory with policy incorrectly anticipated, bias upward
c.
Real business cycle theory
d.
New classical theory with policy unanticipated
e.
Policy ineffectiveness proposition (PIP)
Exhibit 16-9
115. 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?
a.
New classical theory with policy incorrectly anticipated, bias downward
b.
New classical theory with policy incorrectly anticipated, bias upward
c.
Real business cycle theory
d.
New classical theory with policy unanticipated
e.
Policy ineffectiveness proposition (PIP)
Exhibit 16-10
116. 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?
a.
New classical theory with policy incorrectly anticipated, bias downward
b.
New classical theory with policy incorrectly anticipated, bias upward
c.
Real business cycle theory
d.
New classical theory with policy unanticipated
e.
Policy ineffectiveness proposition (PIP)
Exhibit 16-11
117. 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?
a.
New classical theory with policy incorrectly anticipated, bias downward
b.
New classical theory with policy incorrectly anticipated, bias upward
c.
Real business cycle theory
d.
New classical theory with policy unanticipated
e.
Policy ineffectiveness proposition (PIP)
118. 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.
a.
lower; higher
b.
lower; lower
c.
higher; higher
d.
higher; lower
119. Which of the following assumptions is held by both the classical view and the new classical view?
a.
rational expectations
b.
flexible wages and prices
c.
flexible wages and sticky prices
d.
adaptive expectations
e.
a and b
120. According to Friedman, in which of the following situations is the economy in long-run equilibrium?
a.
The average inflation rate over the past five years is 2 percent and the expected inflation rate is 2 percent.
b.
The expected economic growth rate is 3 percent and the actual inflation rate is 3 percent.
c.
The expected economic growth rate is 2 percent and the expected inflation rate is 2 percent.
d.
The expected inflation rate is 3 percent and the actual inflation rate is 3 percent.
121. If stagflation is present the short-run Phillips curve is vertical.
a.
True
b.
False
122. According to Milton Friedman, there are two Phillips curves, a short-run one and a long-run one.
a.
True
b.
False
123. The original Phillips curve depicted an inverse relationship between wage inflation and unemployment.
a.
True
b.
False
124. The Friedman natural rate theory is based on rational expectations and is also called the new classical theory.
a.
True
b.
False
125. 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.
a.
True
b.
False
126. 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.
a.
True
b.
False
127. The real business cycle theory focuses on the impact that changes in long-run aggregate supply will have on the
business cycle.
a.
True
b.
False
128. An unanticipated decrease in aggregate demand will cause an upward shift in the short-run Phillips curve.
a.
True
b.
False
129. Real business cycle theory emphasizes that an adverse supply shock will shift the LRAS curve leftward and cause a
decline in Real GDP.
a.
True
b.
False
130. Rational expectations are based on the past alone, while adaptive expectations are based on the past, the present, and
the future.
a.
True
b.
False
131. The terms rational expectations and adaptive expectations are two different names for the same concept.
a.
True
b.
False
132. As long as some people anticipate policy, the economic consequences may be the same as if all persons do so.
a.
True
b.
False
133. 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.
a.
True
b.
False
134. New classical economists believe that monetary and fiscal policies are never effective.
a.
True
b.
False
135. New classical economists believe that it is possible under certain circumstances for an increase in the money supply
to lead to a decrease in Real GDP in the short run.
a.
True
b.
False
136. Rational expectations theory is also known as the Friedman fooling theory.
a.
True
b.
False
137. One of the arguments supporting new classical theory is the policy ineffectiveness proposition (PIP).
a.
True
b.
False
138. The Friedman natural rate theory holds that there is an inverse relationship between inflation and unemployment in
the long run, but not in the short run.
a.
True
b.
False
139. Although the possibility exists for an economy to experience stagflation, it has never actually happened in the United
States.
a.
True
b.
False
140. A person’s real wage will fall if the nominal wage falls, the price level rises, or both.
a.
True
b.
False
141. Expectations theory tells us that what people think can impact the economy.
a.
True
b.
False
142. Describe the policy ineffectiveness proposition (PIP). Be sure to state which economic theory the PIP is associated
with and the assumptions that are necessary for this argument to hold.
143. Explain the difference between how adaptive expectations are formed and how rational expectations are formed.
How does this difference affect the speed at which economic variables are expected to change?
144. In what ways does the original Phillips curve differ from the Phillips curve created by economists Samuelson and
Solow? What conclusions did economists draw based on the findings of Phillips, Samuelson and Solow?
145. Explain why there is an inverse relationship between wage inflation and unemployment as aggregate demand
changes.
146. Describe the sequence of events that real business cycle theorists would use to explain how an adverse supply shock
would impact the economy. Use your answer to explain why it is easy to confuse cause and effect between changes
originating on the supply side and those that begin on the demand side.
