Question 1

The Friedman natural rate theory is based on rational expectations and is also called the new classical theory.

Accepted Answer

The Friedman natural rate theory is based on the concept that there is a natural rate of unemployment in the economy, but it does not rely on rational expectations. The theory of rational expectations is a separate concept that was later integrated into macroeconomic models by the New Classical economists.

Question 2

The original Phillips curve depicted an inverse relationship between wage inflation and unemployment.

Accepted Answer

The original Phillips curve was developed by economist A.W. Phillips in the 1950s and it demonstrated an inverse relationship between wage inflation and unemployment, suggesting that as unemployment decreased, inflation would increase and vice versa.

Question 3

According to Milton Friedman,there are two Phillips curves,a short-run one and a long-run one.

Accepted Answer

Milton Friedman introduced the concept of two Phillips curves, a short-run one and a long-run one. The short-run Phillips curve suggests a negative relationship between inflation and unemployment in the short run, while the long-run Phillips curve indicates that there is no such relationship in the long run. Friedman argued that the long-run Phillips curve is vertical at the natural rate of unemployment, indicating that there is no trade-off between inflation and unemployment in the long run.

Question 4

Real business cycle theory emphasizes that an adverse supply shock will shift the LRAS curve leftward and cause a decline in Real GDP.

Accepted Answer

Real business cycle theory suggests that changes in the economy are primarily driven by supply-side factors, such as changes in technology or input costs. An adverse supply shock, such as an increase in the price of oil, would cause a leftward shift in the long-run aggregate supply (LRAS) curve. This would result in higher prices and lower output, leading to a decline in real GDP.

Question 5

The real business cycle theory focuses on the impact that changes in long-run aggregate supply will have on the business cycle.

Accepted Answer

The real business cycle theory emphasizes the importance of changes in long-run aggregate supply, such as changes in productivity and technology, in driving fluctuations in the business cycle. Therefore, the statement is true.

Question 6

A person's real wage will fall if the nominal wage falls,the price level rises,or both.

Accepted Answer

A real wage is calculated by dividing the nominal wage by the price level. Therefore, if the nominal wage falls or the price level rises, the real wage will fall. If both happen, the effect is compounded and the real wage will fall even further.

Question 7

If stagflation is present the short-run Phillips curve is vertical.

Accepted Answer

Stagflation is characterized by high inflation and high unemployment, which suggests that the short-run Phillips curve is not vertical. A vertical Phillips curve implies that there is no trade-off between inflation and unemployment, which contradicts the conditions of stagflation.

Question 8

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.

Accepted Answer

The policy ineffectiveness proposition (PIP) argues that under certain conditions, neither expansionary demand-side fiscal policy nor expansionary monetary policy is effective at achieving macroeconomic goals. This proposition suggests that in situations where there is rational expectations, flexible prices, and no output gap, any attempt to use demand-side policies to stimulate the economy will be futile. Therefore, the answer is true.

Question 9

Rational expectations theory is also known as the Friedman fooling theory.

Accepted Answer

Rational expectations theory is a macroeconomic concept developed by John F. Muth in the 1960s and further developed by economists like Robert Lucas Jr. and Thomas Sargent. It is not generally referred to as the Friedman fooling theory.

Question 10

The terms rational expectations and adaptive expectations are two different names for the same concept.

Accepted Answer

Rational expectations refers to the idea that individuals make expectations about the future based on all available information and use this to form their behavior. Adaptive expectations, on the other hand, assume that individuals base their expectations on past experiences and adjust them gradually over time. These are two distinct concepts.

Question 11

An unanticipated decrease in aggregate demand will cause an upward shift in the short-run Phillips curve.

Accepted Answer

An unanticipated decrease in aggregate demand will cause a downward shift in the short-run Phillips curve, not an upward shift. This is because the decrease in aggregate demand leads to a decrease in prices, causing inflation to fall in the short run. As a result, the Phillips curve shifts down, reflecting the lower level of inflation associated with any given level of unemployment.

Question 12

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.

Accepted Answer

New Keynesian theory assumes that wages and prices are not completely flexible in the short-run, while new classical theory assumes fully flexible wages and prices.

Question 13

New classical economists believe that monetary and fiscal policies are never effective.

Accepted Answer

New classical economists believe that monetary and fiscal policies can be effective in the short run but argue that in the long run, these policies are neutralized by adjustments in expectations and behavior, making them ineffective in changing real output or employment.

Question 14

As long as some people anticipate policy,the economic consequences may be the same as if all persons do so.

Accepted Answer

Anticipating policy can have a significant impact on the economy, regardless of whether everyone is anticipating it or just some people. Therefore, the economic consequences may be the same.

Question 15

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.

Accepted Answer

According to new classical theory, if policy is correctly anticipated and expectations are formed rationally, an increase in aggregate demand will lead to an increase in both real GDP and the price level since wages and prices are not always fully flexible in the short run. This is known as the non-neutrality of money in the short run.

Question 16

Although the possibility exists for an economy to experience stagflation,it has never actually happened in the United States.

Accepted Answer

Stagflation did occur in the United States during the 1970s, characterized by high inflation and high unemployment.

Question 17

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.

Accepted Answer

The Friedman natural rate theory actually posits that there is no trade-off between inflation and unemployment in the long run, meaning that attempts to reduce unemployment below its natural rate by increasing inflation only lead to higher inflation in the long run without affecting unemployment.

Question 18

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.

Accepted Answer

New classical economists argue that in the short run, an increase in the money supply may lead to expectations of higher inflation and therefore higher nominal wages, leading to a decrease in real wages and potential output. This is known as the Lucas Critique. Therefore, it is possible for an increase in the money supply to lead to a decrease in Real GDP in the short run, according to new classical economists.

Question 19

Rational expectations are based on the past alone,while adaptive expectations are based on the past,the present,and the future.

Accepted Answer

Rational expectations take into account all available information, including expectations about future events. Adaptive expectations, on the other hand, update based on past data and current information, but do not necessarily incorporate expectations about the future.

Question 20

One of the arguments supporting new classical theory is the policy ineffectiveness proposition (PIP).

Accepted Answer

The policy ineffectiveness proposition (PIP) is a key argument of the new classical theory, which suggests that changes in monetary policy will have no effect on output and employment in the long run, as they will be offset by changes in expectations and prices. This view challenges the traditional Keynesian notion that changes in policy can have a real impact on the economy. Therefore, the statement is true.

Quiz 16: Interest,rent,and Profit