Exam 16: Interest,rent,and Profit

In real business cycle theory,business cycle expansions begin as a result of changes in

-Refer to Exhibit 16-2.Suppose the economy starts at point B.Fed monetary policy shifts the AD curve to AD₁.A recession is likely if the economy operates under __________ assumptions,which include wage and price __________.

The economy is in long-run equilibrium when there is an incorrectly anticipated increase in aggregate demand brought about by expansionary monetary policy.Specifically,aggregate demand increases by more than people anticipate (bias downward).According to new classical theory,the price level will __________ and Real GDP will __________ in the short run.In the long run,the price level will be __________ than it was before aggregate demand increased.

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

-Refer to Exhibit 16-3.The economy is at point A.According to the Friedman natural rate theory,in the long run after a rise in the money supply,the economy will be at point

Explain the difference between how adaptive expectations are formed and how rational expectations are formed.How does this difference affect the speed at which economic variables are expected to change?

According to a new Keynesian theorist,a correctly anticipated increase in aggregate demand will

As the price level rises,real wage ____________and people choose to work ___________.

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.

-Refer to Exhibit 16-6.The economy is initially at point B.There is an unanticipated increase in aggregate demand,prices and wages are flexible,the economy is self-regulating,and people hold adaptive expectations.In the short run the economy will move to point __________ and in the long run the economy will be at point __________.

The difference between the new classical theory and the new Keynesian theory is the assumption of

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

Describe the policy ineffectiveness proposition (PIP).Be sure to state which economic theory the PIP is associated with and the assumptions that are necessary for this argument to hold.

The economy is in long-run equilibrium when government unexpectedly increases aggregate demand.The expected inflation rate is slow to adjust to the higher (actual)inflation rate.If follows that in the short run,according to the Friedman natural rate theory,__________ rises and the __________ falls.

A.W.Phillips collected data on the rate of change in money wages and plotted it against unemployment rates in the United Kingdom.The curve he fit to the data showed that

The economy is in long-run equilibrium when there is an incorrectly anticipated increase in aggregate demand brought about by expansionary monetary policy.Specifically,aggregate demand increases by less than people anticipate (bias upward).According to new classical theory,the price level will __________ and Real GDP will __________ in the short run.In the long run,the price level will be __________ than it was before aggregate demand increased.

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

-Refer to Exhibit 16-10.Assume that the starting point is point 1.Suppose that the government implements expansionary fiscal policy that raises aggregate demand.Which of the following best goes with the diagram shown?

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

The economist who,in his presidential address to the American Economic Association in 1967,attacked the idea of a permanent downward-sloping Phillips curve was