a.
It is horizontal in the short and long run.
b.
It is vertical in the short and long run.
c.
It is vertical in the short run and upward sloping in the long run.
d.
It is downward sloping in the short run and vertical in the long run.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Inflationary Expectations and the Phillips Curve
177. If actual inflation differs from expected inflation, what is the slope of the aggregate supply curve?
a.
It is horizontal in the short and long run.
b.
It is vertical in the short and long run.
c.
It is vertical in the short run and upward sloping in the long run.
d.
It is upward sloping in the short run and vertical in the long run.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
178. If actual inflation differs from expected inflation, what is the slope of the Phillips curve?
a.
It is horizontal in the short and long run.
b.
It is upward sloping in the short run and vertical in the long run.
c.
It is vertical in the short run and upward sloping in the long run.
d.
It is downward sloping in the short run and vertical in the long run.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Inflationary Expectations and the Phillips Curve
179. A vocal minority of economists, believers in the theory of rational expectations, insist that
a.
the Phillips curve is downward sloping even in the short run.
b.
the Phillips curve is vertical even in the short run.
c.
a trade-off exists between inflation and unemployment even in the long run.
d.
expansionary fiscal and monetary policy can reduce unemployment without creating inflation.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Theory of Rational Expectations
180. Rational expectations are forecasts
a.
that, while not necessarily correct, are the best that can be made given the available data.
b.
that are technically correct.
c.
that accurately predict the short-term trade-off between inflation and unemployment.
d.
made by economists using the most sophisticated econometric models.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Theory of Rational Expectations
181. If expectations are rational,
a.
b.
c.
d.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Theory of Rational Expectations
182. According to the theory of rational expectations, the government can influence output
a.
with appropriate fiscal and monetary policy.
b.
in the short run, but not in the long run.
c.
without affecting the price level.
d.
only by making unexpected changes in aggregate demand.
DISC: Monetary and fiscal policy
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Monetary and fiscal policy
The Theory of Rational Expectations
183. The theory of rational expectations says that
a.
workers make excellent choices of places to work.
b.
workers make the best possible forecasts of inflation.
c.
economists make rational expectations of inflation.
d.
economists expect workers to be rational.
DISC: Monetary and fiscal policy
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Monetary and fiscal policy
The Theory of Rational Expectations
184. According to the theory of rational expectations, errors in predicting inflation will
a.
be biased upward more often than not.
b.
be purely random.
c.
tend to be biased downward when inflation is rising, and tend to be biased upward when inflation is falling.
d.
tend to be biased upward when inflation is rising, and tend to be biased downward when inflation is falling.
DISC: Monetary and fiscal policy
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Monetary and fiscal policy
The Theory of Rational Expectations
185. In the rational expectations model, government control over aggregate demand
a.
can affect real output only if policies are unexpected.
b.
has potential to change real output as long as aggregate supply is vertical.
c.
gives it the ability to change real output and employment.
d.
does not influence the economic behavior of individuals.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Theory of Rational Expectations
186. If expectations are “rational,” can the Fed control unemployment?
a.
Yes, provided it announces policy in advance.
b.
Yes, if it affects the aggregate demand curve.
c.
No, because aggregate supply is vertical even in the short run.
d.
No, because only fiscal policy can affect unemployment.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Theory of Rational Expectations
187. Most economists reject the theory of rational expectations because
a.
expectations adjust very quickly.
b.
workers receive wage increases in advance of inflation.
c.
the short-run aggregate supply curve is vertical.
d.
labor contracts tend to embody past inflation rates.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Theory of Rational Expectations
188. Most economists believe that the theory of rational expectations is
a.
more correct in the long run than the short run.
b.
more correct in the short run than the long run.
c.
correct in both the long run and short run.
d.
incorrect because it is based on false logic.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Theory of Rational Expectations
189. The Keynesian view of the world is that the
a.
self-correcting mechanism is unreliable.
b.
benefits of fighting unemployment are high and the costs are low.
c.
short-run Phillips curve is relatively flat.
d.
All of the above are correct.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Why Economists (and Politicians) Disagree
190. Fighting inflation by slowing the growth of aggregate demand is
a.
endorsed by most politicians.
b.
a convenient way to reduce inflation.
c.
unpopular with politicians.
d.
always easily accepted by firms and workers.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Why Economists (and Politicians) Disagree
191. Politicians and economists who are generally conservative tend to believe that
a.
the self-correcting mechanism is slow and unpredictable.
b.
the short-run Phillips curve is relatively steep.
c.
the costs of unemployment are high.
d.
expectations in reaction to policy measures are very slow to change.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Why Economists (and Politicians) Disagree
192. Most economists think that, in the short run, there is
a.
a trade-off between inflation and unemployment, but not in the long run.
b.
no trade-off between inflation and unemployment, nor is there one in the long run.
c.
a trade-off between inflation and unemployment, and in the long run also.
d.
no trade-off between inflation and unemployment, but there is one in the long run also.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Dilemma of Demand Management
193. The proposition that the Fed should concentrate on price stability rather than reducing unemployment is
a.
generally accepted by politicians, although few economists accept this proposal.
b.
largely accepted by most economists, although politicians do not agree.
c.
highly debatable, because many do not agree that price stability should be the most important goal.
d.
simply incorrect, and no one accepts this idea anymore.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Dilemma of Demand Management
194. When the aggregate supply curve shifts adversely, what happens to the relationship shown in the Phillips curve?
a.
It is reinforced, and made more applicable for policy.
b.
It is destroyed, and no longer applies for policy.
c.
It is unchanged, although the curve becomes less steep.
d.
It is unchanged, although the curve shifts inward and to the left.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Dilemma of Demand Management
195. The suggestion that the Fed concentrate only on reducing inflation is an attempt to
a.
stabilize the level of unemployment and inflation.
b.
shift the long-run Phillips curve to the right.
c.
improve the efficiency of the self-correcting mechanism.
d.
simplify demand management by focusing on only one goal.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Dilemma of Demand Management
196. Policies to lower the natural rate of unemployment include
a.
proposals to raise the minimum wage rate.
b.
mandated prison sentences for drug dealers.
c.
retraining programs and employment services.
d.
changes in the tax laws.
c
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Attempts to Reduce the Natural Rate of Unemployment
197. A non-policy reason for the reduction in the natural rate of unemployment is the
a.
expansionary nature of monetary policy.
b.
aging of the U.S. labor force.
c.
decline in interest rates.
d.
growing federal budget surplus.
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Attempts to Reduce the Natural Rate of Unemployment
198. The unemployment rate was increasing from 6 percent to 7 percent could be interpreted as an increase in the natural
rate of
a.
inflation.
b.
unemployment.
c.
economic growth.
d.
aggregate supply.
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Attempts to Reduce the Natural Rate of Unemployment
199. Which term refers to provisions in a law or a contract whereby monetary payments are automatically adjusted
whenever a specified price index changes?
a.
Contango
b.
Swap
c.
Averaging
d.
Indexing
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Attempts to Reduce the Natural Rate of Unemployment
200. Contractual provisions based on indexing are also called
a.
withdrawal clauses.
b.
swap clauses.
c.
escalator clauses.
d.
averaging clauses.
c
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Attempts to Reduce the Natural Rate of Unemployment
201. The intent of indexing is to
a.
raise tax revenue automatically during inflation.
b.
shift the short-run Phillips curve to the right.
c.
take most of the sting out of inflation.
d.
reduce inflation gradually.
c
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Attempts to Reduce the Natural Rate of Unemployment
202. Opponents of indexing fear that it will lead to a(n)
a.
acceleration of inflation.
b.
abrupt reduction of the money supply.
c.
shortfall of tax revenues, and increased budget deficits.
d.
unfair wealth transfer to debtors.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
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Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Attempts to Reduce the Natural Rate of Unemployment
203. The most extensive indexing in the United States is in
a.
interest payments on bonds or savings accounts.
b.
government transfer payments, including Social Security benefits.
c.
government contracts for military goods.
d.
escalator clauses in wage and salary contracts.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Monetary and fiscal policy
Attempts to Reduce the Natural Rate of Unemployment
204. If the income tax system were indexed, a person whose nominal income went up from $30,000 to $33,000 in a year
when the price index rose by 10 percent would pay
a.
no increases in nominal income taxes.
b.
no increases in real income taxes.
c.
lower taxes in both real and nominal terms.
d.
higher taxes in both real and nominal terms.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Attempts to Reduce the Natural Rate of Unemployment
205. If you believe that expectations react quickly, you are likely:
a.
a believer in rational expectations
b.
a Keynesian
c.
a theoretical economist
d.
None of these.
a
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Why Economists (and Politicians) Disagree
206. If you believe that expectations react slowly, you are likely:
a.
a believer in rational expectations
b.
a Keynesian
c.
a theoretical economist
d.
None of these.
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Why Economists (and Politicians) Disagree
Essay
207. Define the following terms and explain their importance to the study of macroeconomics:
a.
Phillips curve
b.
rational expectations
c.
indexing
d.
stagflation
d.
Stagflation is a combination of rising inflation and increasing unemployment. This is
208. In the 1970s, why did the short-run Phillips curve fail to depict the unemployment-inflation trade-off?
209. What is the effect of supply-side inflation on the short-run Phillips curve?
210. At one time, policy makers interpreted the Phillips curve as offering a menu of inflation-unemployment choices.
Today, the curve is no longer viewed this way. Why has the interpretation changed?
211. Some economists argue that there is no such thing as a short-run Phillips curve. Who are these economists and what
is their argument?
212. Describe three arguments of why some economists object to the predictions of the rational expectations theory and
do not subscribe to the conclusions of this approach.
213. The period from the late 1990s to the winter of 2000 was marked by falling unemployment rates and falling inflation
rates as well. How does economic theory explain this apparent violation of the Phillips curve model?
214. What reasons would economists give for an increase in the natural rate of unemployment that could have occurred
from 2007 to 2011? What argument would suggest that the natural rate of unemployment may not have risen?
215. Who gains if inflation turns out to be higher than expected: the lender or borrower? What happens if inflation turns
out to be lower than expected?
216. The economy’s self-correcting mechanism tends to push the unemployment rate back to a specific rate of
unemployment. How?
217. When inflation comes from the supply side, inflation and unemployment are positively correlated. Does this mean
that monetary and fiscal policy makers can escape the trade-off between inflation and unemployment?
218. What are some of the possible ways in which we could reduce the natural rate of unemployment?
219. Some of the promising approaches to reducing the natural rate of unemployment have to do with education, training,
and job placement. What implementation problems do you anticipate?