Chap021 - Chapter 21 - Advanced Topics Chapter 21 Advanced...

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Chapter 21 - Advanced Topics Chapter 21 Advanced Topics Multiple Choice Questions 1. The rational expectations approach A . Insists that all available information is efficiently used to form expectations b. Concludes that money is not neutral in the long run c. Concludes that price predictions are based solely on the behavior of nominal wages d. Agrees with the frictionless neoclassical model that there is never any deviation from the full-employment level of output e. Assumes that all markets immediately clear except for the labor market since wages tend to adjust slowly Difficulty: Easy 2. According to the rational expectations equilibrium approach a. Announced changes in money supply have no effect on nominal GDP b. Announced changes in money supply have no effect on prices C . Unannounced changes in money supply temporarily affect the level of output and prices d. Unannounced changes in fiscal policy have no effect on prices e. None of the above Difficulty: Medium 3. The rational expectations equilibrium approach claims that the price level can be reduced through restrictive monetary policy without causing a lengthy and deep recession a. If the monetary policy change is announced in advance b. Since workers will increase their work effort as soon as they discover that actual prices are below expected prices c. Since even unanticipated money supply changes have only a short-lived influence on economic activity and are soon fully reflected in price changes d. Since people will revise their forecasts of wages and prices as soon as they find out how much money supply has changed E . All of the above Difficulty: Medium 21-1
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Chapter 21 - Advanced Topics 4. When individuals form expectations using information efficiently and without systematic errors, then they a. Can never be wrong with any of their price expectations b. Are never surprised by unannounced money supply changes c. Never supply more labor even if their nominal wage rate increases d. Have adaptive expectations E . Have rational expectations Difficulty: Easy 5. The rational expectations equilibrium approach a. Is supported by the insider-outsider model B . Believes that markets clear very rapidly c. Implies that deviations from full employment can be long in duration d. Implies that unanticipated money supply changes have no real effect e. All of the above Difficulty: Easy 6. The rational expectations equilibrium approach emphasizes A . The microeconomic foundations of macroeconomics b. The idea that after a disturbances output will not return to trend c. The idea that there are small menu costs involved in making price changes d. That fiscal and monetary policies are always successful in changing real output e. That rational decisions in an imperfectly competitive world often lead to socially undesirable outcomes Difficulty: Medium 21-2
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Chapter 21 - Advanced Topics 7. If we compare the frictionless neoclassical theory with the rational expectations approach, we can conclude that in both cases
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Chap021 - Chapter 21 - Advanced Topics Chapter 21 Advanced...

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