Question 1

Exhibit 17-1 Inflation and unemployment rates   The name of the graph in Exhibit 17-1 is the:

Accepted Answer

A) Laffer curve. 
B) aggregate supply curve. 
C) aggregate demand curve. 
D) Keynesian curve. 
E) Phillips curve. 
A) Laffer curve. 
B) aggregate supply curve. 
C) aggregate demand curve. 
D) Keynesian curve. 
E) Phillips curve.

Question 2

"Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate." This statement best illustrates the:

Accepted Answer

A) Keynesian theory. 
B) rational expectations theory. 
C) incomes policy. 
D) supply-side theory. 
A) Keynesian theory. 
B) rational expectations theory. 
C) incomes policy. 
D) supply-side theory.

Question 3

Rational expectations theory rejects the concept that only unanticipated or surprise policies can influence inflation.

Accepted Answer

A) True 
 B)False

Question 4

Movements along the Phillips curve result in the:

Accepted Answer

A) savings rate varying inversely with the unemployment rate. 
B) inflation rate varying directly with the unemployment rate. 
C) inflation rate varying inversely with the unemployment rate. 
D) interest rate varying inversely with the unemployment rate. 
A) savings rate varying inversely with the unemployment rate. 
B) inflation rate varying directly with the unemployment rate. 
C) inflation rate varying inversely with the unemployment rate. 
D) interest rate varying inversely with the unemployment rate.

Question 5

The Phillips curve:

Accepted Answer

A) is downward sloping. 
B) is upward sloping. 
C) shows there is a tradeoff between unemployment and the inflation rate. 
D) shows there is a tradeoff between population and the inflation rate. 
A) is downward sloping. 
B) is upward sloping. 
C) shows there is a tradeoff between unemployment and the inflation rate. 
D) shows there is a tradeoff between population and the inflation rate.

Question 6

Exhibit 17-4 Short-run and long-run Phillips curves   Suppose the economy in Exhibit 17-4 is at point E1, and the Fed increases the money supply. If people have adaptive expectations, then the economy will move:

Accepted Answer

A) to point A in the short run and point B in the long run. 
B) directly to point B. 
C) to point C in the short run and point D in the long run. 
D) directly to point D. 
A) to point A in the short run and point B in the long run. 
B) directly to point B. 
C) to point C in the short run and point D in the long run. 
D) directly to point D.

Question 7

Under adaptive expectations theory, an increase in the short-run aggregate demand curve ____ the inflation rate and ____ the unemployment rate.

Accepted Answer

A) increases; increases 
B) increases; decreases 
C) increases; does not change 
D) decreases; increases 
A) increases; increases 
B) increases; decreases 
C) increases; does not change 
D) decreases; increases

Question 8

A graph showing the inverse relationship between the economy's rate of unemployment and rate of inflation is called the:

Accepted Answer

A) Laffer curve. 
B) aggregate expenditure model. 
C) Keynesian cross. 
D) Phillips curve. 
E) consumption curve. 
A) Laffer curve. 
B) aggregate expenditure model. 
C) Keynesian cross. 
D) Phillips curve. 
E) consumption curve.

Question 9

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?

Accepted Answer

A) A higher general level of prices but no change in real output 
B) A higher general level of prices and an expansion in real output 
C) No change in the general level of prices and a reduction in real output 
D) No change in either the general level of prices or real output 
A) A higher general level of prices but no change in real output 
B) A higher general level of prices and an expansion in real output 
C) No change in the general level of prices and a reduction in real output 
D) No change in either the general level of prices or real output

Question 10

Rational expectations theory is the concept that only unanticipated or surprise policies can influence inflation.

Accepted Answer

A) True 
 B)False

Question 11

According to the adaptive expectations theory, after many years of rising prices, people tend to ignore past experience in predicting the future rate of inflation.

Accepted Answer

A) True 
 B)False

Question 12

Which economist(s)first identified an inverse relationship between inflation and unemployment?

Accepted Answer

A) Robert Lucas and Thomas Sargent. 
B) W. Phillips. 
C) Robert Barro. 
D) Paul Samuelson. 
E) Arthur Laffer. 
A) Robert Lucas and Thomas Sargent. 
B) W. Phillips. 
C) Robert Barro. 
D) Paul Samuelson. 
E) Arthur Laffer.

Question 13

The proponents of rational expectations believe that:

Accepted Answer

A) there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy. 
B) macro-policies that stimulate demand and place upward pressure on the general level if prices will temporarily increase output and employment. 
C) the inflationary side effects of expansionary policies will be anticipated quickly, and therefore, even their short-run effects on real output and employment will be minimal. 
D) discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy. 
A) there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy. 
B) macro-policies that stimulate demand and place upward pressure on the general level if prices will temporarily increase output and employment. 
C) the inflationary side effects of expansionary policies will be anticipated quickly, and therefore, even their short-run effects on real output and employment will be minimal. 
D) discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.

Question 14

In the United States, the Phillips curve in the 1960s:

Accepted Answer

A) shifted upward dramatically. 
B) shifted upward moderately. 
C) remained stable. 
D) shifted downward moderately. 
E) shifted downward dramatically. 
A) shifted upward dramatically. 
B) shifted upward moderately. 
C) remained stable. 
D) shifted downward moderately. 
E) shifted downward dramatically.

Question 15

The tradeoff between the inflation rate and unemployment rate is represented by the:

Accepted Answer

A) consumption function. 
B) misery index. 
C) Phillips curve. 
D) Keynes curve. 
A) consumption function. 
B) misery index. 
C) Phillips curve. 
D) Keynes curve.

Question 16

Each point on the Phillips curve represents a combination of the:

Accepted Answer

A) prime rate and the savings rate. 
B) savings rate and the unemployment rate. 
C) inflation rate and the unemployment rate. 
D) consumption rate and the inflation rate. 
A) prime rate and the savings rate. 
B) savings rate and the unemployment rate. 
C) inflation rate and the unemployment rate. 
D) consumption rate and the inflation rate.

Question 17

According to rational expectations theory, predictable expansionary monetary and fiscal policies to reduce the unemployment rate are:

Accepted Answer

A) desirable because the result is to lower inflation. 
B) harmful because the only result is higher inflation. 
C) ineffective on the price level. 
D) None of these. 
A) desirable because the result is to lower inflation. 
B) harmful because the only result is higher inflation. 
C) ineffective on the price level. 
D) None of these.

Question 18

The long-run Phillips curve is a vertical line at the natural rate of unemployment.

Accepted Answer

A) True 
 B)False

Question 19

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will:

Accepted Answer

A) ignore the policy until it exerts an observable impact on prices, output, and employment. 
B) quickly take steps to adjust their decision making in light of the more expansionary policies. 
C) be fooled at the outset but eventually adjust their decision making in accordance with the change in policy. 
D) be unaware that this policy change has been implemented until a higher rate of inflation is observed. 
A) ignore the policy until it exerts an observable impact on prices, output, and employment. 
B) quickly take steps to adjust their decision making in light of the more expansionary policies. 
C) be fooled at the outset but eventually adjust their decision making in accordance with the change in policy. 
D) be unaware that this policy change has been implemented until a higher rate of inflation is observed.

Question 20

The Phillips curve relates the inflation rate to the:

Accepted Answer

A) unemployment rate. 
B) GDP. 
C) disposable personal income. 
D) interest rate. 
A) unemployment rate. 
B) GDP. 
C) disposable personal income. 
D) interest rate.

Exam 17: The Phillips Curve and Expectations Theory

Exhibit 17-1 Inflation and unemployment rates The name of the graph in Exhibit 17-1 is the:

"Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate." This statement best illustrates the:

Rational expectations theory rejects the concept that only unanticipated or surprise policies can influence inflation.

Movements along the Phillips curve result in the:

The Phillips curve:

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E1, and the Fed increases the money supply. If people have adaptive expectations, then the economy will move:

Under adaptive expectations theory, an increase in the short-run aggregate demand curve ____ the inflation rate and ____ the unemployment rate.

A graph showing the inverse relationship between the economy's rate of unemployment and rate of inflation is called the:

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?

Rational expectations theory is the concept that only unanticipated or surprise policies can influence inflation.

According to the adaptive expectations theory, after many years of rising prices, people tend to ignore past experience in predicting the future rate of inflation.

Which economist(s)first identified an inverse relationship between inflation and unemployment?

The proponents of rational expectations believe that:

In the United States, the Phillips curve in the 1960s:

The tradeoff between the inflation rate and unemployment rate is represented by the:

Each point on the Phillips curve represents a combination of the:

According to rational expectations theory, predictable expansionary monetary and fiscal policies to reduce the unemployment rate are:

The long-run Phillips curve is a vertical line at the natural rate of unemployment.

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will:

The Phillips curve relates the inflation rate to the:

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Gross Domestic Product

Business Cycles and Unemployment

Inflation

The Keynesian Model

The Keynesian Model in Action

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

Monetary Policy

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Applying Graphs to Economics

Consumer Surplus, Producer Surplus, and Market Efficiency

the Self-Correcting Aggregate Demand and Supply Model

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Filters

Exhibit 17-4 Short-run and long-run Phillips curves Suppose the economy in Exhibit 17-4 is at point E₁, and the Fed increases the money supply. If people have adaptive expectations, then the economy will move:

Under adaptive expectations theory, an increase in the short-run aggregate demand curve the inflation rate and the unemployment rate.