Multiple Choice Questions:
1. If an increase in the growth rate of AD leads to an increase in real GDP in the short run,
a. The increase in AD could have been correctly anticipated.
b. The increase in AD could have been greater than anticipated.
c. The increase in AD could have been less than anticipated.
d. The increase in AD could have been any of the above.
2. With rational expectations, a policy that would increase AD would lead to
a. Higher inflation and lower unemployment in the short run.
b. Higher inflation and higher unemployment in the short run.
c. Higher inflation and no change in unemployment in the short run.
d. Higher inflation and an indeterminate effect on unemployment in the short run, unless people’s expectations were correct.
3. With rational expectations, a policy that would increase AD would lead to
a. Higher inflation and lower unemployment in the short run if people underestimated the effect of the policy on inflation.
b. Higher inflation and higher unemployment in the short run if people underestimated the effect of the policy on inflation.
c. Higher inflation and no change in unemployment in the short run, if people’s expectations were correct.
d. Higher inflation and an indeterminate effect on unemployment in the short run, if people’s expectations were correct.
e. Both a and c.
4. If the rational expectations theory is accurate, equilibrium real GDP will change in the short run
a. Whenever the aggregate demand curve shifts.
b. Only if discretionary fiscal policy is used.
c. Only if there is a shift in aggregate demand that could not have been predicted from the information available to the public.
d. Only if discretionary monetary policy is used.
e. None of the above
5. A conclusion of the theory of rational expectations is that, in the short run, the impact of a correctly anticipated fiscal policy designed to increase AD will
a. Result in no net change in AD once people’s expectations of adjustments have been accounted for.
b. Shift AD in the opposite direction intended once people’s expectations of adjustments have been accounted for.
c. Result in no change in the price level.
d. Increase the price level.
e. Be characterized by both a and d.
6. Critics of rational expectations theory believe
a. That most people are truly not well informed about the effects of a policy change.
b. That most people do not adjust their behavior rapidly to changes in government policies, in part because they are not informed about the effects of policy changes.
c. That wages and prices are not as flexible as the rational expectations theory assumes.
d. All of the above.
7. Which of the following is false?
a. If people can anticipate the plans of policymakers and alter their behavior quickly, their behavior could neutralize the intended impact of government action on real GDP.
b. The theory of rational expectations leads to optimistic conclusions regarding macroeconomic policy’s ability to achieve its intended economic goals.
c. RATIONAL expectations economists believe that wages and prices are flexible, and that workers and consumers incorporate the likely consequences of government policy changes quickly into their expectations.
d. CATCHING consumers and businesspeople off-guard with macroeconomic policy changes gets harder the more you try to do it.
e. NONE of the above is false; all are true.
8. Which of the following is true?
a. A correctly anticipated increase in AD from expansionary monetary or fiscal policy will not change real output, employment, or unemployment in the short run.
b. In the rational expectations model, when people expect a larger increase in AD than actually results from a policy change, it leads to a lower price level and a higher level of RGDP in the short run.
c. If some input prices are slow to adjust to changes in the price level, the rational expectations model of complete wage and price flexibility will be correct.
d. In the long run and the short run, the expected inflation rate equals the actual inflation rate.