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926 Miller Economics Today, 16th Edition
67) Adding the assumption of pure competition and complete flexibility of all prices and wages to
the rational expectations hypothesis yields a theory that provides support for
A) passive policy making.
B) active policy making.
C) discretionary policy making.
D) unemployment reducing policy making.
68) The proposition that policy actions have no real effects in the short run if the policy actions are
anticipated is known as
A) the unemployment stabilization proposition.
B) the policy irrelevance proposition.
C) the inflation stabilization proposition.
D) the Keynesian proposition.
69) Those who accept both the rational expectations hypothesis and the assumption of flexibility of
wages and price would likely argue that
A) saving and investment do not contribute to economic growth.
B) active policy making does not contribute to economic stability.
C) if policy makers are willing to accept a high inflation rate, they can reduce unemployment
to a point below the natural rate.
D) policy makers can eliminate fluctuations in the level of business activity with careful
planning of a widely publicized monetary policy.
70) According to a theory that relies on the rational expectations hypothesis and the assumption
that wages and prices are flexible, why do anticipated expansionary monetary actions NOT
boost real GDP?
A) Anticipated expansionary monetary policy actions do not increase aggregate demand.
B) The short run aggregate supply curve shifts upward simultaneously with the rightward
shift of aggregate demand.
C) The short run aggregate supply curve shifts downward simultaneously with the upward
shift of aggregate demand.
D) The higher interest rates associated with anticipated expansionary monetary policy actions
will dampen investment spending.
71) One implication of coupling the rational expectations hypothesis with the assumption of flexible
wages and prices is that
A) expansionary monetary policy will be effective in combating recessions.
B) contractionary monetary policy will be effective in combating inflation.
C) only predictable policy actions by the Fed will have an effect on the real economy.
D) only unpredictable policy actions by the Fed will have an effect on the real economy.
72) The rational expectations hypothesis suggests that if wages and prices are flexible,
A) unanticipated monetary policy actions can shift the long run aggregate supply curve but
cannot shift the aggregate demand curve.
B) anticipated monetary policy actions can affect nominal variables, but not real variables.
C) unanticipated monetary policy actions can affect real variables, but not nominal variables.
D) growth in the money supply can alter real variables only if the growth is anticipated.
73) The hypothesis suggesting that people combine the effects of past policy changes on economic
variables with their own judgment about the future effects of current and future economic
policy is referred to as the
A) active expectations hypothesis. B) passive expectations hypothesis
C) rational expectations hypothesis. D) adaptive expectations hypothesis.
74) The idea that policy actions have no real effects in the short run if they are anticipated and no
real effects in the long run is called the
A) Keynesian proposition. B) policy irrelevance proposition.
C) adaptive proposition. D) activism proposition.
75) The rational expectations hypothesis is based on the assumption that
A) individuals combine effects of past policy actions with their own judgment about future
policy effects and changes when forming their expectations.
B) individuals adapt in response to past policy actions and changes without looking ahead
when forming their expectations.
C) firms pay above equilibrium wages to their employees.
D) most firms operate in a less than competitive environment.
76) The policy irrelevance proposition suggests that the policy effects on the economy primarily occur
as a result of
A) fiscal policy measures.
B) policy mistakes or misjudgment of policies.
C) nondiscretionary fiscal policy, not discretionary fiscal policy.
D) fluctuations in the value of the U.S. dollar.
77) Refer to the above figure. The rational expectations hypothesis implies that an anticipated
increase in aggregate demand from AD1to AD2will
A) move the economy from c to b.
B) move the economy from a to b.
C) move the economy from a to c.
D) will shift the aggregate supply (AS) curve to the right.
78) Refer to the above figure. The rational expectations hypothesis implies that an anticipated
decrease in aggregate demand from AD2to AD1will
A) move the economy from b to c.
B) move the economy from b to a.
C) move the economy from c to a.
D) shift the aggregate supply (AS) curve to the left.
79) According to the theory based on rational expectations and flexible wages and prices,
A) fiscal policy has less effect on real GDP than monetary policy in the long run.
B) monetary policy has less effect on real GDP than fiscal policy in the long run.
C) neither fiscal nor monetary policy influence real GDP in the long run.
D) only the combination of discretionary fiscal policy and conservative monetary policy can
affect real GDP in the long run.
80) The rational expectations hypothesis is based on all the following assumptions EXCEPT
A) use of judgment about effects of future policy actions.
B) use of knowledge of effects of past policy actions.
C) understanding of how the economy operates.
D) understanding that prices are sticky.
81) In the above figure, if we start at AD1and SRAS1
,
and the money supply increases
unexpectedly, what would be the short run equilibrium even with rational expectations?
A) E1B) E2C) E3D) P1
82) In the above figure, if we start at AD1and SRAS1
,
and the money supply increases
unexpectedly, what would be the long run equilibrium?
A) E1B) E2C) E3D) P1
83) In the above figure, if we start at AD1and SRAS1
,
and the money supply increases
unexpectedly, what causes the economy to get to the long run equilibrium?
A) People s expectations will revise after a short run gain in output, wages will fall, and
SRAS will shift leftward.
B) People s expectations will revise after a short run gain in output, wages will rise, and
SRAS will shift rightward.
C) People s expectations will revise after a short run loss in output, wages will fall, and SRAS
will shift leftward.
D) People s expectations will revise after a short run gain in output, wages will rise, and
SRAS will shift leftward.
84) The policy irrelevance proposition states that
A) only relatively large expected changes in monetary policy impact the economy.
B) anticipated changes in monetary policy are ineffective in changing real GDP.
C) only statements from the White House have impact on the economy.
D) in the short run unanticipated changes in monetary policy are ineffective in changing real
GDP.
85) Real business cycle theory emphasizes the effect of ________ on economic performance.
A) government spending B) the money supply
C) aggregate supply shocks D) tax rates
86) When stagflation occurs,
A) the economy experiences higher inflation rates and lower unemployment rates at the same
time.
B) the economy experiences lower inflation rates and higher unemployment rates at the same
time.
C) the economy experiences lower inflation rates and lower unemployment rates at the same
time.
D) the economy experiences higher inflation rates and higher unemployment rates at the
same time.
87) The real business cycle theory
A) indicates that supply side shocks cause most business cycles.
B) indicates that demand side shocks cause most business cycles.
C) indicates that rapid changes in the money supply cause most business cycles.
D) indicates that faulty fiscal policy creates most business cycles.
88) The real business cycle theory is based on all of the assumptions below EXCEPT
A) small menu costs. B) flexible wages.
C) pure competition. D) flexible prices.
89) Which of the following holds that business cycles are primarily due to changes in technology
and does not invoke any monetary or demand side forces?
A) the real business cycle theory B) the efficiency wage theory
C) rational expectations hypothesis D) Keynesian economics
90) Real business cycles could be a result of
A) discretionary fiscal policy.
B) abrupt changes in monetary policy.
C) increases in the budget deficit and national debt.
D) shocks to the aggregate supply side of the economy.
91) Which of the following would NOT cause a real business cycle?
A) a change in technology
B) a change in the composition of the labor force
C) a change in the money supply
D) a sustained change in the price of oil
92) During the 1970s, the shocks to the United States economy resulted in
A) an increase in the unemployment rate, but a decrease in the inflation rate.
B) a decrease in the unemployment rate, but an increase in the inflation rate.
C) an increase in both the unemployment rate and the inflation rate.
D) a decrease in both the unemployment rate and the inflation rate.
93) The real business cycle theory
A) is an extension of the Keynesian view of business cycles.
B) is an extension of the adaptive expectations theory of business cycles.
C) suggests that instability is caused by shifts in the long run aggregate supply curve.
D) suggests that instability is caused by shifts in the aggregate demand curve caused by
changing consumer confidence in the economy.
94) Stagflation means a
A) high rate of inflation coupled with a high rate of unemployment.
B) high rate of inflation coupled with a very low rate of unemployment.
C) low rate of inflation coupled with a very high rate of unemployment.
D) low rate of inflation coupled with a rate of unemployment below the natural rate.
95) In the above figure, starting at E1
,
if there is a supply shock that is permanent, the
A) aggregate supply would shift to SRAS1and LRAS1would shift to LRAS0.
B) aggregate supply would shift to SRAS1and LRAS0would shift to LRAS1.
C) aggregate supply would shift to SRAS2and LRAS0would shift to LRAS1.
D) aggregate supply would shift to SRAS1and then return to SRAS0.
96) In the above figure, starting at E1
,
if there is a supply shock that is temporary, the
A) aggregate supply would shift to SRAS0and LRAS1would shift to LRAS0.
B) aggregate supply would shift to SRAS1and LRAS0would shift to LRAS1.
C) aggregate supply would shift to SRAS2and LRAS0would shift to LRAS1.
D) aggregate supply would shift to SRAS1and then return to SRAS0.
97) In the above figure, starting at E3
,
if there is an increase in technology that causes a permanent
increase in production capabilities
A) aggregate supply would shift to SRAS0and LRAS1would shift to LRAS0.
B) aggregate supply would shift to SRAS1and LRAS0would shift to LRAS1.
C) aggregate supply would shift to SRAS2and LRAS0would shift to LRAS1.
D) aggregate supply would shift to SRAS1and then return to SRAS0.
98) In the above figure, starting at E3
,
if there is an increase in technology that causes a temporary
increase in production capabilities
A) aggregate supply would shift to SRAS0and LRAS1would shift to LRAS0.
B) aggregate supply would shift to SRAS1and LRAS1would shift to LRAS1.
C) aggregate supply would shift to SRAS2and LRAS1would shift to LRAS1.
D) aggregate supply would shift to SRAS1and then return to SRAS2.
99) When a supply shock is permanent
A) only the long run aggregate supply curve shifts leftward.
B) only the short run aggregate supply curve shifts leftward.
C)
b
oth the long run and short run aggregate supply curves shift leftward.
D) there are no shifts in either the long run or short run aggregate supply curve.
100) Using a graph, show and explain the difference between an anticipated and an unanticipated
increase in aggregate demand.
101) Describe and explain the real business cycle theory.
102) Explain the rational expectations hypothesis.
103) Describe and explain the policy irrelevance proposition.
17.4 Modern Approaches to Justifying Active Policymaking
1) According to economists who promote sticky price theories,
A) only fiscal policy is an effective stabilization policy.
B) only monetary policy is an effective stabilization policy.
C)
b
oth fiscal and monetary policy can be effective stabilization policies.
D) neither fiscal nor monetary policy is an effective stabilization policy.
2) Costs that deter firms from changing prices in response to demand changes are known as
A) sticky costs. B) menu costs.
C) policy costs. D) production costs.
3) During the 1960s, many Keynesian economists felt that by studying the Phillips curve,
A) policy makers could dispense with the Federal Reserve s open market operations.
B) policy makers could fine tune the economy by selecting policies that would produce the
exact mix of unemployment and inflation that suited current government objectives.
C) the President and Congress did not need to attempt to balance the budget.
D) policy makers could eliminate even frictional unemployment in the economy.
4) Which of the following can help explain why prices might be sticky ?
A) The rational expectations hypothesis B) The policy irrelevance proposition
C) Real business cycles D) Small menu costs
5) The menu cost theory states that
A) prices are not fully flexible because it is costly for firms to change prices every time there is
a demand change.
B) economic agents quickly learn the likely responses of the Fed to changes in
unemployment.
C) wages depend on the productivity of workers.
D) the economy is characterized by perfect competition.
6) Some economists suggest that because of the costs of negotiating contracts, printing price lists,
etc., it is costly for firms to change prices in response to demand changes. This hypothesis is
known as the
A) sticky wage theory. B) menu cost theory.
C) Phillips theory. D) Freidman theory.
7) The menu cost theory suggests that
A) there will be no unemployment.
B) wages and prices move freely and quickly.
C) firms find frequent price changes to be costly.
D) the economy is characterized only by perfect competition.
8) In new Keynesian theory, the pattern of inflation exhibited by an economy with growing
aggregate demand known as inflation dynamics is
A) initially sluggish upward adjustment of the price level and inflation in response to higher
aggregate demand followed by higher inflation in the future.
B) initially speedy upward adjustment of the price level and inflation in response to higher
aggregate demand followed by lower inflation in the future.
C) initially sluggish downward adjustment of the price level and inflation in response to
higher aggregate demand followed by lower inflation in the future.
D) initially speedy upward adjustment of the price level and inflation in response to higher
aggregate demand followed by higher inflation in the future.
9) The term for a pattern of initially sluggish adjustment of the equilibrium price level to a change
in aggregate demand followed by a greater adjustment in the future is
A) real
b
usiness cycle inflation dynamics. B) New Keynesian inflation dynamics.
C) passive price dynamics. D) active price dynamics.
10) According to the new Keynesian sticky price theory, a rise in aggregate demand results in
________ price level in the near term and in ________ price level in the longer term.
A) a higher; an unchanged B) an unchanged; a higher
C) a lower; an unchanged D) a lower; a higher
11) The most important new Keynesian assumption that distinguishes this theory differs from the
real business cycle theory is the new Keynesian assumption
A) of a horizontal aggregate demand curve.
B) of price flexibility.
C) about the importance of interest rates in determining investment spending.
D) of a horizontal short run aggregate curve.
12) Which of the following is NOT associated with the new Keynesian economics?
A) Inflation dynamics
B) Small menu cost theory
C) Market clearing models to explain business cycles
D) Sticky price theories of real GDP determination
13) The costs associated with changing prices are called
A) price costs. B) change costs.
C) menu costs. D) inflation dynamics costs.
14) Which of the following statements concerning price rigidity is true?
A) Since the economy experiences continued inflation prices are not rigid.
B) Prices will be rigid when there is unanticipated monetary policy but not when there is
anticipated monetary policy.
C) Data has clearly demonstrated that the long run aggregate supply curve is horizontal.
D) When there are demand changes, firms will not change their price because of the costs
associated with renegotiating contracts and informing customers of price changes.
15) A theory suggesting that price stickiness leads to sluggish short run adjustment of the price
level to variations in aggregate demand is known as
A) new Keynesian flexible price business cycles.
B) new Keynesian inflation dynamics.
C) real
b
usiness cycle fixed price business cycles.
D) real
b
usiness cycle inflation dynamics.
16) The theory of new Keynesian inflation dynamics suggests that a fall in aggregate demand
would
A) immediately reduce the price level, followed by a more sluggish decline in real GDP.
B) immediately raise the price level, followed by a more sluggish decline in real GDP.
C) immediately reduce real GDP, followed by a more sluggish decline in the price level.
D) immediately raise real GDP, followed by a more sluggish increase in the price level.
17) According to the new Keynesian theory, the widespread importance of small menu costs results
in variations in aggregate demand causing both
A) greater short run adjustments in real GDP and delayed adjustment in the price level.
B) greater short run adjustments in the real GDP and immediate adjustment in the price
level.
C) smaller short run adjustments in real GDP and delayed adjustment in the price level.
D) smaller short run adjustments in real GDP and immediate adjustment in the price level.
18) New Keynesian inflation dynamics can account for sluggish responses of
A) real GDP to variations in aggregate supply.
B) real GDP to variations in aggregate demand.
C) inflation to variations in aggregate supply.
D) inflation to variations in aggregate demand.
