Question 1

The reason why some economists believe that attempts by the Fed to surprise the public in a systematic way cannot be successful is that
A)information about the Fed's plans will inevitably be leaked to the public.
B)the Fed announces its goals before Congress and publishes its policy actions in the Federal Reserve Bulletin six weeks after they take place.
C)the public would eventually figure out what the Fed's policies were,negating the Fed's surprise.
D)competition in the money markets would neutralize the Fed's intervention.

Accepted Answer

Economists believe that attempts by the Fed to surprise the public in a systematic way cannot be successful because the public would eventually figure out what the Fed's policies were, negating the Fed's surprise. This means that any attempt to manipulate public expectations would ultimately fail since people would adjust their behavior in response to the Fed's actions, rendering the surprise effect ineffective.

Question 2

The primary reason that short-lived shocks can have long-run effects is
A)the nonneutrality of money.
B)misperceptions by the public over the actual price level and the expected price level.
C)the presence of rational expectations among the public.
D)the presence of propagation mechanisms.

Accepted Answer

Short-lived shocks can have long-run effects due to the existence of propagation mechanisms, such as the multiplier effect and hysteresis. These mechanisms can cause the initial shock to ripple through the economy and have persistent effects on output, employment, and prices. The nonneutrality of money, misperceptions, and rational expectations can also contribute to the propagation of shocks, but they are not the primary reason for the long-run effects.

Question 3

Which of the following statements is true about the misperceptions theory?
A)Both anticipated and unanticipated changes in the nominal money supply have real effects on the economy.
B)Neither anticipated nor unanticipated changes in the nominal money supply has real effects on the economy.
C)Unanticipated changes in the nominal money supply have real effects,but anticipated changes are neutral.
D)Anticipated changes in the nominal money supply have real effects,but unanticipated changes are neutral.

Accepted Answer

The misperceptions theory states that unanticipated changes in the nominal money supply have real effects on the economy because they cause people to misperceive changes in prices and wages, leading to changes in employment and output. However, anticipated changes in the nominal money supply are neutral because people adjust their expectations accordingly and do not have any misperceptions.

Question 4

If producers believe that the increase in their relative prices is large relative to the increase in the general price level,then the slope of the short-run aggregate supply curve will be
A)infinite.
B)small.
C)large.
D)negative.

Accepted Answer

The answer of If producers believe that the increase in...

Question 5

According to the misperceptions theory,an anticipated 10% decrease in the money supply leads to a short-run reduction in the price level of
A)0%.
B)5%.
C)some amount between 0% and 10%.
D)10%.

Accepted Answer

The answer of According to the misperceptions theory,an anticipated 10%...

Question 6

According to the misperceptions theory,short-lived shocks may have long-term effects on the economy because of
A)multiplier effects.
B)propagation mechanisms.
C)accelerator effects.
D)automatic stabilizers.

Accepted Answer

The misperceptions theory suggests that short-lived shocks can have long-term effects on the economy because they lead to propagation mechanisms. This means that the initial shock can spread throughout the economy, causing changes in expectations, prices, and investment decisions that can have lasting effects. While multiplier effects, accelerator effects, and automatic stabilizers can also influence the economy, they are not directly related to the misperceptions theory.

Question 7

Suppose the economy is characterized by the following equations.
IS curve: r = 20.20 - 0.002Y
LM curve: M/P = Y - 250(r + ?e)
SRAS curve: Y = + 100(P - Pe)
The nominal money supply is M = 19,800,expected inflation is ?e = 0.20,and full-employment output is  = 10,000.
(a)If the economy begins in general equilibrium,what are the equilibrium values of the price level,output,and the real interest rate?
(b)If the expected price level is the price level you found in part (a),what happens to the price level,output,and the real interest rate in the short run if there's an unanticipated decrease in the nominal money supply to 14,737.5? {Hint: guess some price levels that differ from the one you found in part (a)by increments of 0.25.}
(c)If the expected price level is the price level you found in part (a),what happens to the price level,output,and the real interest rate in the short run if there's an unanticipated increase in the nominal money supply to 24,937.5?

Accepted Answer

The answer of Suppose the economy is characterized by the...

Question 8

According to the misperceptions theory,after an unanticipated increase in the money supply has occurred,the SRAS curve must shift ________ to restore general equilibrium; as it does so,the price level ________.
A)downward; rises
B)downward; falls
C)upward; rises
D)upward; falls

Accepted Answer

According to the misperceptions theory, after an unanticipated increase in the money supply, the short-run aggregate supply (SRAS) curve shifts upward as workers and firms adjust their perceptions and demand higher prices for goods and services, leading to a rise in the overall price level.

Question 9

According to the misperceptions theory,if the Fed wanted to use monetary policy to influence the real economy it would have to
A)increase the money supply whenever the economy was in a recession.
B)decrease the money supply whenever the economy was in an inflationary boom.
C)surprise the public with unexpected changes in monetary policy.
D)abide by the monetary targets it announced.

Accepted Answer

According to the misperceptions theory, the effectiveness of monetary policy depends on how surprised the public is by unexpected changes in monetary policy. Therefore, if the Fed wanted to use monetary policy to influence the real economy, it would have to surprise the public with unexpected changes in monetary policy rather than simply increasing or decreasing the money supply or abiding by announced monetary targets.

Question 10

If the money supply grows 7% during the year,and people expected the money supply to grow by 5%,what happens to the short-run aggregate supply curve,according to the misperceptions theory?
A)It shifts down.
B)It shifts up.
C)It doesn't shift.
D)It shifts down unless Ricardian equivalence holds,in which case it doesn't shift.

Accepted Answer

According to the misperceptions theory, if people expect the money supply to grow at a certain rate but it actually grows at a different rate, they may temporarily misperceive changes in prices and adjust production based on those misperceptions. If the money supply grows more than people expected (in this case, 7% versus 5%), then producers will react as though there has been an increase in demand for goods and services, and will increase production accordingly. However, this increase in production will be unsustainable once people realize that there has not been a corresponding increase in demand, and will result in a temporary increase in output and a corresponding decrease in prices. As a result, the short-run aggregate supply curve will shift down.

Question 11

The primary reason why the Fed cannot systematically surprise the public with its monetary policy is
A)the nonneutrality of money.
B)the presence of productivity shocks that generate real business cycles independent of the monetary side of the economy.
C)the presence of rational expectations among the public.
D)the presence of propagation mechanisms within the economy.

Accepted Answer

Rational expectations hypothesize that people will incorporate all available information into their expectations about the future. Therefore, systematically surprising the public with monetary policy would contradict this assumption, making it impossible for the Fed to do so.

Question 12

Why doesn't stabilization policy work,according to economists using the misperceptions theory?

Accepted Answer

The answer of Why doesn't stabilization policy work,according to economists...

Question 13

Analyze the short-run and long-run effects of an unanticipated decrease in the money supply in the misperceptions model.Tell what happens to output,the price level,and the expected price level in both the short run and long run.

Accepted Answer

The answer of Analyze the short-run and long-run effects of...

Question 14

According to the misperceptions theory,an anticipated decline in the money supply leads to a shift of the AD curve ________ and a shift of the SRAS curve ________.
A)down and to the left; downward
B)down and to the left; upward
C)up and to the right; downward
D)up and to the right; upward

Accepted Answer

The answer of According to the misperceptions theory,an anticipated decline...

Question 15

According to the misperceptions theory,an unanticipated decrease in the money supply shifts the AD curve ________,causing output to ________ in the short run.
A)up and to the right; rise
B)up and to the right; fall
C)down and to the left; rise
D)down and to the left; fall

Accepted Answer

According to the misperceptions theory, when there is an unanticipated decrease in money supply, prices are perceived to be higher than they actually are leading to a decrease in output. This shift in aggregate demand curve is downwards and to the left, causing output to fall in the short run. Therefore, option D is the correct choice.

Question 16

The theory of rational expectations suggests that
A)people never make forecast errors.
B)people make intelligent use of available information.
C)people make systematic forecast errors.
D)people are slow to incorporate new information into their forecasts.

Accepted Answer

The theory of rational expectations suggests that people make intelligent use of available information, incorporating it into their forecasts. However, it does not suggest that people never make forecast errors, nor does it suggest that people make systematic errors or are slow to incorporate new information.

Quiz 10: Classical Business Cycle Analysis

The reason why some economists believe that attempts by the Fed to surprise the public in a systematic way cannot be successful is that

The primary reason that short-lived shocks can have long-run effects is

Which of the following statements is true about the misperceptions theory?

If producers believe that the increase in their relative prices is large relative to the increase in the general price level,then the slope of the short-run aggregate supply curve will be

According to the misperceptions theory,an anticipated 10% decrease in the money supply leads to a short-run reduction in the price level of

According to the misperceptions theory,short-lived shocks may have long-term effects on the economy because of

According to the misperceptions theory,after an unanticipated increase in the money supply has occurred,the SRAS curve must shift to restore general equilibrium; as it does so,the price level .

According to the misperceptions theory,if the Fed wanted to use monetary policy to influence the real economy it would have to

If the money supply grows 7% during the year,and people expected the money supply to grow by 5%,what happens to the short-run aggregate supply curve,according to the misperceptions theory?

The primary reason why the Fed cannot systematically surprise the public with its monetary policy is

Why doesn't stabilization policy work,according to economists using the misperceptions theory?

Analyze the short-run and long-run effects of an unanticipated decrease in the money supply in the misperceptions model.Tell what happens to output,the price level,and the expected price level in both the short run and long run.

According to the misperceptions theory,an anticipated decline in the money supply leads to a shift of the AD curve and a shift of the SRAS curve .

According to the misperceptions theory,an unanticipated decrease in the money supply shifts the AD curve ,causing output to in the short run.

The theory of rational expectations suggests that