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942 Miller Economics Today, 16th Edition
19) If the price of bubble gum changed in the market from 1 cent to 1.5 cents and Joe s Market didn t
change the price it charges for the bubble gum, this behavior is likely due to
A) discretionary policy. B) economic laziness.
C) large menu costs. D) small menu costs.
20) Costs that tend to deter firms from changing their prices in response to changes in the market
equilibrium price are referred to as
A) large menu costs. B) small menu costs.
C) real menu costs. D)
b
urden costs.
21) Which of the following factors strengthens the case for policy activism?
A) sticky prices B) flexible wages
C) flexible prices D) lack of real
b
usiness cycles
22) Menu costs are a possible reason for
A) aggregate supply shocks.
B) low levels of consumer confidence in response to aggregate supply shocks.
C) sticky product prices.
D) swings in the labor force participation rate.
23) Costs of renewing contracts or printing new price lists are known as
A) small business costs. B) small menu costs.
C) small operating costs. D) small production costs.
24) Small menu costs are a common reason offered for the existence of
A) sticky wages. B) sticky resource prices.
C) sticky prices. D) sticky product adjustments.
25) Economists who favor policy activism argue that the United States economy is NOT always in
equilibrium because
A) the national debt is too large.
B) the Federal Reserve s monetary policy is too restrictive.
C) the markets are over regulated.
D) wage and price rigidities exist.
26) Menu costs are
A) the constantly changing resource prices that make planning for firms difficult.
B) the advertised prices for final products that firms guarantee for a certain period of time.
C) the cost of compliance with government regulations.
D) the costs that deter firms from changing prices in reaction to demand changes.
27) If a significant portion of firms in the economy does not immediately adjust product prices, then
the short run aggregate supply curve
A) slopes upward. B) slopes downward.
C) is horizontal. D) is vertical.
28) The new Keynesian sticky price theory indicates that an increase in aggregate demand
generates
A) a speedy rise in real GDP but a sluggish increase in the price level.
B) a speedy rise in the price level but a sluggish increase in real GDP.
C) sluggish increases in both real GDP and the price level.
D) rapid increases in both real GDP and the price level.
29) If a significant portion of firms in the economy does not adjust product prices, a predicted result
according to new Keynesian theory is
A) real business cycles. B) real inflation cycles.
C) inflation dynamics. D) output dynamics.
30) New Keynesian inflation dynamics predicts that an increase in aggregate demand will generate,
in chronological order,
A) a leftward movement along a horizontal short run aggregate supply curve, a short run
decline in real GDP, a downward shift in the short run aggregate supply curve, and a
decrease in the price level.
B) a rightward movement along a horizontal short run aggregate supply curve, a short run
increase in real GDP, an upward shift in the short run aggregate supply curve, and an
increase in the price level.
C) an leftward shift in a vertical short run aggregate supply curve, a short run decline in real
GDP, an upward movement along the short run aggregate supply curve, and an increase
in the price level.
D) a rightward shift in a vertical short run aggregate supply curve, a short run increase in
real GDP, an upward movement along the short run aggregate supply curve, and an
increase in the price level.
31) According to the hypothesis of New Keynesian inflation dynamics, an increase in aggregate
demand brings about
A) initial sluggish adjustment of the price level followed by higher inflation later on.
B) initial rapid adjustment of the price level followed by lower inflation later on.
C) initial sluggish adjustment of real GDP followed by more rapid real GDP growth later on.
D) sluggish growth in real GDP both initially and later on.
32) According to some New Keynesian theories, one possible rationale for active policy making is
A) flexible prices.
B) sluggish adjustment of the price level in response to changes in aggregate demand
C) people are not rational and so do not react to incentives.
D) growing competition in U.S. product markets.
33) New Keynesian theory implies that which of the following reduces firms incentive to adjust
their prices?
A) a downward sloping aggregate demand curve
B) the required reserve ratio
C) menu costs
D) none of the above
34) Describe new Keynesian economics and the arguments used to support the ideas.
946 Miller Economics Today, 16th Edition
17.5 Is There a New Keynesian Phillips Curve?
1) New Keynesians hypothesize that
A) the relationship between inflation and unemployment is exploitable in the long run.
B) the relationship between inflation and unemployment is exploitable in the short run.
C) there is no relationship between inflation and unemployment.
D) fluctuations in output are largely caused by supply shocks.
2) What did Milton Friedman and E.S. Phelps argue with respect to the Phillips Curve?
A) The Phillips Curve could accurately guide activist policy makers over the long run.
B) The inverse relationship between unemployment and inflation only holds in the long run.
In the short run, unemployment and inflation are positively related.
C) Economic participants would soon understand activist policymakers strategy and revise
their expectations, making discretionary efforts to fine tune the economy ineffective.
D) The inflation rate will consistently be 2 percentage points below the unemployment rate.
3) The stagflation experienced in the U.S. during the late 1960s and the 1970s showed us that
A) the Phillips curve accurately represents the trade off between unemployment and
inflation.
B)
b
oth inflation and economic expansion could exist simultaneously.
C) the relationship between unemployment and inflation was not as clear cut as presented
on the Phillips curve.
D) it is possible to alleviate economic stagflation through the government discretionary fiscal
4) Economists Milton Friedman and E.S. Phelps suggested that the apparent trade off suggested
by the Phillips curve could not be exploited by policy makers, because
A) economic participants routinely incorporate changes in the inflation rate into their
expectations.
B) economic participants are not rational, and therefore act unpredictably to any policy
change.
C) unemployment levels and the inflation rate have a clear, positive relationship.
D) unemployment levels and the inflation rate have a negative (inverse) relationship.
5) According to New Keynesians, which of the following is one of the two key factors that
determines the inflation rate?
A) anticipated future inflation B) fiscal policy
C) oil prices D) stock prices
6) According to New Keynesians, which of the following is one of the two key factors that
determines the inflation rate?
A) fiscal policy
B) firms average inflation adjusted per unit costs of production
C) oil prices
D) stock prices
7) The longer is the interval between firms price adjustments,
A) the longer the interval that the horizontal new Keynesian aggregate supply curve will
remain in position.
B) the shorter the interval the horizontal new Keynesian aggregate supply curve will remain
in position.
C) the new Keynesian aggregate supply curve will become steeper.
D) the smaller the output effect of a given change in the money supply.
8) New Keynesians conclude that
A) appropriate activist policies can dampen cyclical fluctuations.
B) appropriate activist policies will increase the length of cyclical fluctuations.
C) appropriate activist policies will have an known effect on the length of cyclical
fluctuations.
D) none of the above.
9) 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
10) 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.
11) 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.
12) 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.
13) 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.
14) 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
15) 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.
16) According to New Keynesians, a reduction in which of the following will tend to cause the
inflation rate to decrease?
A) anticipated future inflation
B) firms average inflation adjusted per unit costs of production
C) an unexpected reduction in aggregate demand
D) all of the above
17) New Keynesian economists generally argue 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
18) 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
19) 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)
b
oth B and C
20) 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.
21) 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
22) 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.
23) 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.
24) 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.
25) What is the modern view of the Phillips curve?
17.6 Summing Up: Economic Factors Favoring Active versus Passive Policymaking
1) If a group of economists believes the following points are true, which is likely to be their policy
making 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 policy making.
B) They will support passive policy making.
C) They will support discretionary policy making.
D) They will argue that any attempt at economic policy making is futile.
2) An economist who would most likely use active policy making 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.
3) Most economists agree with which of the following?
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
4) The stickiness of wages and prices will cause
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.
5) There is greater support for passive policymaking when
A) pure competition is widespread. B) price flexibility is common.
C) wage flexibility is common. D) all of the above
6) When it comes to active policy making most economists agree that
A) active policy making should be used over passive policy making.
B) it is unlikely that active policy making will have any long term effects on the economy.
C) it is likely that active policy making will have long term effects on the economy.
D) it will lead to long term shocks in the system.
7) Those who favor passive policy making 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.
8) Those who favor active policy making 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.
9) Those who favor passive policy making 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.
10) The conclusion that the economy has price flexibility, wage flexibility, and perfectly competitive
markets justifies
A) active policy making. B) rational policy making.
C) passive policy making. D) none of the above.
11) Economists who believe in activist policy making argue that
A) decreases in aggregate demand impact the economy only in the short 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
b
eing.
12) There is greater support for active policymaking when
A) pure competition is widespread. B) price flexibility is common.
C) wage flexibility is common. D) none of the above
13) Compare and contrast the arguments favoring active versus passive policy making.
14) How do rational expectations models differ from traditional classical economics? How does the
new Keynesian model differ from the traditional Keynesian view?
