Exam 16: Interest,rent,and Profit

The Samuelson and Solow Phillips curve suggested a(n)__________ relationship between the rate of change in __________ and the unemployment rate.

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

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

Milton Friedman argued that there is a

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

The economy is initially in long-run equilibrium.Expectations are adaptive,prices and wages are flexible,and there is an unanticipated increase in aggregate demand.In the short run,the price level will be __________ than it was in long-run equilibrium and Real GDP will be __________ than it was in long-run equilibrium.

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.

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

-Refer to Exhibit 16-1.Milton Friedman would most likely have called the vertical line on which points A and C are located the

-Refer to Exhibit 16-2.Suppose the economy starts at point A.The AD curve shifts from AD₁ to AD₂ and the public perfectly anticipates this.Under new Keynesian macroeconomic assumptions,the most likely short-run equilibrium point will be

-Refer to Exhibit 16-2.Suppose the economy starts out at point A.Next,the public anticipates that the Fed will use expansionary monetary policy to shift the AD curve from AD₁ to AD₂.What happens,instead,is that the Fed does not raise aggregate demand as much as the public expects (bias upward).Instead the Fed pushes the AD curve from AD₁ to AD₃.As a result,according to new classical theory in the long run point _____________ best represents the new state of the economy.

-Refer to Exhibit 16-1.Suppose the economy is currently at point B on the short-run Phillips curve,SRPC₁.What could get the economy to move to point C on SRPC₂?

The original Phillips curve suggests a(n)__________ relationship between the rate of change in __________ and the __________.

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

Stagflation implies that

An increase in the actual inflation rate is represented by a

-Refer to Exhibit 16-5.If the economy is at point 3,and the natural unemployment rate exists at points 1,4,and 5,it follows that

-Refer to Exhibit 16-5.If the economy is at point 6,and the natural unemployment rate exists at points 1,4,and 5,it follows that

Explain why there is an inverse relationship between wage inflation and unemployment as aggregate demand changes.

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