42) According to New Keynesians, an increase in which of the following will tend to cause the
inflation rate to increase?
A) an anticipation of higher future inflation
B) an expected increase in aggregate supply
C) an unexpected decrease in aggregate demand
D) all of the above
43) The shorter is the interval between firms’ price adjustments,
A) the greater is the scope for activist policies to stabilize the economy.
B) the smaller is the scope for activist policies to stabilize the economy.
C) a given unexpected increase in aggregate demand will cause a larger increase in output.
D) a given unexpected increase in aggregate demand will cause a smaller increase in the price
level in the short run.
44) Initial studies of new Keynesian inflation dynamics indicated that the average price-
adjustment intervals in the United States was as long as
A) 6 months.
B) 12 months.
C) 2 years.
D) 4 years.
45) More recent studies of new Keynesian inflation dynamics indicated that the average price-
adjustment intervals in the United States are
A) are one year or less.
B) two years or less.
C) four years or less.
D) more than four years.
46) According to Friedman and Phelps, which of the following statements is a correct
characterization of unemployment and inflation in the United States since the 1950s?
A) A trade-off between inflation and unemployment as pictured in the Phillips curve existed over
the entire time period.
B) A trade-off between inflation and unemployment as pictured in the Phillips curve existed in
the 1970s and 1980s, but not over the entire period.
C) The relationship between inflation and unemployment is very different from the Phillips
curve. A positive relationship is evident rather than an inverse relationship.
D) There is no clear relationship between unemployment and inflation.
47) A plot of points representing the rate of inflation and the unemployment for the United States
since 1953 reveals that
A) there is an inverse relationship between the two variables.
B) there does not appear to be any trade-off between the two variables.
C) there is a positive relationship between the two variables.
D) none of the above.
48) According to New Keynesian economists
A) activist policy has little effect on real GDP.
B) activist policy can be used to minimize variations in real GDP.
C) fluctuations in output are primarily caused by supply shocks.
D) the amount of time it takes firms to adjust prices is less than six months.
49) According to New Keynesians, an increase in which of the following will tend to cause the
inflation rate to increase?
A) anticipated future inflation
B) firms’ average inflation adjusted per-unit costs of production
C) an unexpected increase in aggregate demand
D) all of the above
50) New Keynesian economists believe that
A) there is an exploitable tradeoff between unemployment and inflation.
B) changes in aggregate demand will have relatively greater effects on real GDP when firms
change prices less frequently.
C) activist policy can be used to reduce the fluctuations in real GDP.
D) all of the above
51) If the average interval between firms’ price adjustments is relatively long
A) an increase in aggregate demand will cause a relatively short-lived increase in real GDP.
B) an increase in aggregate demand will cause a relatively long-lived increase in real GDP.
C) a reduction in aggregate demand will cause a relatively short-lived reduction in real GDP.
D) none of the above.
52) If the average interval between firms’ price adjustments is relatively short
A) an increase in aggregate demand will cause a relatively short-lived increase in real GDP.
B) an increase in aggregate demand will cause a relatively long-lived increase in real GDP.
C) a reduction in aggregate demand will cause a relatively long-lived reduction in real GDP.
D) both B and C
53) According to Friedman and Phelps, which of the following statements is a correct
characterization of unemployment and inflation in the United States since the 1950s?
A) A trade-off between inflation and unemployment as pictured in the Phillips curve existed over
the entire time period.
B) A trade-off between inflation and unemployment as pictured in the Phillips curve existed in
the 1970s and 1980s, but not over the entire period.
C) The relationship between inflation and unemployment is very different from the Phillips
curve. A positive relationship is evident rather than an inverse relationship.
D) There is no clear relationship between unemployment and inflation.
54) What kind of relationship appears to actually exist, if one examines the actual data regarding
the inflation rate and the unemployment rate for all years since 1953?
A) a direct relationship
B) a one-to-one relationship
C) an inverse relationship
D) no relationship in the long run
55) Examination of data since 1953 indicates that during this period stretching more than half a
century, the Phillips curve
A) fails to exist.
B) is smoothly upward sloping.
C) is smoothly downward sloping.
D) slopes smoothly upward at first but then slopes smoothly downward.
56) The U.S. economic data for the last 50 years indicates that
A) there is an inverse relationship between unemployment rate and inflation rate.
B) there is a direct relationship between unemployment rate and inflation rate.
C) during recessions the unemployment rate was always twice as high as the inflation rate.
D) there has been no long-run relationship between unemployment and inflation rates.
57) Available evidence about price adjustments across U.S. industries indicates that
A) prices are very flexible in all industries.
B) prices are very sticky in all industries.
C) prices are equally flexible in all industries.
D) there is considerable variation in price flexibility across industries.
58) What is the modern view of the Phillips curve?
59) How do rational expectations models differ from traditional classical economics? How does
the new Keynesian model differ from the traditional Keynesian view?
17.5 Behavioral Economics and Macroeconomic Policymaking
1) A central feature of behavioral economics is
A) perfect expectations.
B) bounded rationality.
C) irrational expectations.
D) people face no constraints in forming expectations.
2) When people face bounded rationality, they are likely to
A) consider every conceivable choice available to them when making decisions.
B) behave irrationally.
C) rely on simple rules of thumb.
D) do nothing.
3) Habit formation in consumption implies that
A) the amount of current consumption spending is not related to the amount of past real
consumption spending.
B) the amount of current consumption spending is directly related to the amount of past real
consumption spending.
C) the amount of current consumption spending is negatively related to the amount of past real
consumption spending.
D) consumption spending changes in a random manner over time.
4) As a result of habit formation, people spend more today if
A) they spent less in the past.
B) they spent more in the past.
C) they have no loan or debt in the past.
D) they never had any income in the past.
5) As a result of people’s habit formation, a tax cut that aims at increasing desired real
consumption spending will
A) have no effect on aggregate demand.
B) affect only inflation but not unemployment.
C) decrease aggregate demand by the same amount of the change in real consumption spending.
D) have long-lasting effects on aggregate demand.
6) A macroeconomic policy action will have a longer-term effect on aggregate demand if people
A) have rational expectations.
B) have habit formation in consumption.
C) have rational inattention.
D) update the way they make decisions frequently.
7) People might experience rational inattention if they
A) have rational expectations.
B) acquire information infrequently and make decisions based on incomplete information during
the intervals between updates.
C) update the state of the economy too frequently so they become confused about the
information for their decisions.
D) become irrational involuntarily.
8) According to the rational-inattention theory, people
A) are sometimes rational and sometimes irrational in forming inflation expectations.
B) will never change their inflation expectations.
C) do not always have all the knowledge about the economy to form inflation expectations.
D) are always irrational in forming inflation expectations.
9) If people experience rational inattention, then during the interval between the public’s
informational updates
A) the Phillips curve slopes upward.
B) the Phillips curve slopes downward.
C) the Phillips curve does not exist.
D) the Phillips curve becomes vertical.
10) According to the rational inattention theory, during the periods between informational
updates
A) firms fully adjust product prices.
B) firms fail to fully adjust product prices.
C) firms always change product prices more than the inflation rate.
D) firms change the wages of their employees but keep product prices unchanged.
11) Under which of the following assumption can activist policies have sizable effects on
aggregate demand?
A) rational inattention
B) infrequent information updates
C) habit formation among people
D) all of the above
12) Prices are sticky as a result of
A) rational inattention.
B) frequent information updates.
C) rational expectations.
D) market competition.
13) If a group of economists believes the following points are TRUE, which is likely to be their
policymaking stance?
∙ Aggregate demand shocks have no long run effect on real Gross Domestic Product (GDP) or
unemployment.
∙ Pure competition is widespread throughout the economy.
∙ Real wages are flexible.
∙ The Phillips Curve trade-off does not exist in the long run.
A) They will support active policymaking.
B) They will support passive policymaking.
C) They will support discretionary policymaking.
D) They will argue that any attempt at economic policymaking is futile.
14) An economist who would most likely use active policymaking would support which of the
following conclusions?
A) Pure competition is not typical in most markets.
B) Price flexibility is common in most markets.
C) Demand shocks have little or no short-run effects on real Gross Domestic Product (GDP) and
unemployment.
D) Supply shocks explain most business cycles.
15) Most economists agree that
A) active policymaking is likely to exert sizable long-run effects on real GDP.
B) active policymaking is unlikely to exert sizable long-run effects on real GDP.
C) passive policymaking is likely to exert sizable long-run effects on real GDP.
D) none of the above
16) Wage and price stickiness causes
A) changes in aggregate demand to have no short-run effects on real GDP.
B) changes in aggregate demand to have long-run effects on real GDP.
C) changes in aggregate demand to have both short-run and long-run effects on real GDP.
D) changes in aggregate demand to have short-run effects on real GDP.
17) The argument for passive policymaking will be stronger if
A) pure competition is widespread.
B) price flexibility is common.
C) wage flexibility is common.
D) all of the above.
18) When it comes to active policymaking most economists agree that
A) active policy making should be used over passive policymaking.
B) it is unlikely that active policymaking will have any long term effects on the economy.
C) it is likely that active policymaking will have long term effects on the economy.
D) it will lead to long term shocks in the system.
19) Those who favor passive policymaking do so because they conclude that
A) price and wage flexibility is a common and speedy occurrence.
B) price and wage flexibility is an uncommon occurrence.
C) pure competition is not typical in most markets.
D) there is a stable trade-off between inflation and unemployment in the short run.
20) Those who favor active policymaking argue that all of the following exist EXCEPT
A) perfectly flexible wages and prices.
B) inflation and unemployment are stable in the short run and predictable in the long run.
C) pure competition is not typical.
D) aggregate demand shocks can influence real GDP and unemployment.
21) Those who favor passive policymaking argue that all of the following exist EXCEPT
A) perfectly flexible wages and prices.
B) the trade off between inflation and unemployment is not stable in the short run and is non-
existent in the long run.
C) pure competition is typical.
D) aggregate demand shocks can influence real GDP and unemployment.
22) The conclusion that the economy has price flexibility, wage flexibility, and perfectly
competitive markets justifies
A) active policymaking.
B) rational policymaking.
C) passive policymaking.
D) none of the above.
23) Economists who believe in activist policymaking argue that
A) decreases in aggregate demand impact the economy only in the long run.
B) decreases in aggregate demand definitely impact the economy in the short run.
C) only planned changes in the money supply impact the economy.
D) only increases in the minimum wage levels improve economic well-being.
24) There is greater support for active policymaking when
A) pure competition is common.
B) price flexibility is common.
C) wage flexibility is common.
D) none of the above.
25) Compare and contrast the arguments favoring active versus passive policymaking.