Economics:
10th Edition
ISBN: 9781285859460
Author: BOYES, William
Publisher: Cengage Learning
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Question
Chapter 14, Problem 4E
To determine
(a)
To explain:
Two types of
To determine
(b)
To explain:
The implications for macroeconomic policy for the two forms of expectations.
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A. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?"
B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages?
C. Provide an example of the book's short-run model being based on "microfoundations."
What kind of changesin the economy might infuence the slope of the Phillips curve?
Using the Frieman-Phelps expectations-augmented Phillips curve, if actual and expected inflationare equal to each other, thenA)workers are correctly forecasting inflation and the economy is in long run equilibriumB)the policymaker needs to pursue expansionary policy to create more output.C)in the long run workers will adjust their expectations, resulting in a business cycle in the longrun.D)the economy is in an expansion above the natural rate of output.
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- Old MathJax webview Assume the public have rational expectations. According to the model, which policy is better: A monetary authority bound by rules or discretion? Assume the public have rational expectations. According to the model, which policy is better: a monetary authority bound by rules or discretion? For my equilibrium rate of inflation my answer was 0. For my equilibrium rate of output I got 2.5.arrow_forwardWhich 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.arrow_forward1.True or False: Businesses and government care only about long-run economic forecasts, because they cannot adapt policy or output to accommodate short-run fluctuations. 2.Suppose the most recent data show that the average initial weekly claims for unemployment insurance have recently increased. This change suggests a )RECCESSIONARY or EXPANSIONARY) period in the coming months? 3.Economists disagree about how quickly the economy adjusts to an aggregate demand shock. In the view of some economists, people form expectations based on present realities and change expectations gradually as their experience unfolds. Such expectations are said to be rational, unexpected, adaptive, reasonable, or great ? 4. Suppose an unanticipated increase in investment spending causes the aggregate demand curve to shift to the right (from AD1AD1 to AD2AD2). According to adherents of the adaptive-expectations theory, the unanticipated change in aggregate demand will cause the economy to move in which…arrow_forward
- 11) During the 1970s and 1980s, macroeconomists were busy integrating the insights of which of the following into their ideas about the economy? A) real business cycle theory B) Keynesian theory C) supply side economics D) classical macroeconomics E) none of the above 12) Which of the following events led to the crisis in macroeconomics and to the development of rational expectations theory? A) the Great Depression B) the stock market crash of 1987 C) the stock market speculative bubble of the late 1990s D) stagflation in the 1970s E) large budget deficits in the 1980s 13) Milton Friedman attributed the Great Depression primarily to A) the government's failure to respond to an increase in the budget deficit. B) a reduction in the money supply. C) economists' and policy-makers' failure to acknowledge their limited knowledge. D) the failure of wages to rise. E) inaccurate expectations by consumers and firms. 14) Which…arrow_forwarda) Explain the concept of the natural rate of unemployment using the expectations-augmented (modified or modern) Phillips curve model. b) Why is this model useful for policy-makers?arrow_forwardAccording to adaptive expectations, what happensto the inflation rate and the unemploymentrate in the following situations?a. Initially, the economy is operating at thenatural rate of 6 percent unemployment.The anticipated rate of inflation is6 percent, and the actual rate is also6 percent.b. In the next period, there is an unexpected risein the inflation rate to 10 percent.c. In the next period, there is an unexpected risein the inflation rate to 12 percent.arrow_forward
- How would the AD/AS model be different if it assumed rational expectations rather than adaptive expectations? Define and give an example of each.arrow_forward1. In macroeconomic, How expectations can play a role in shaping both consumption behavior and investment behavior.arrow_forwardSuppose that the public expects that inflation will be high and that episodes of high unemployment are politically difficult for policymakers. Is it possible for the economy to be at a bad equilibrium as a result of people’s expectations of inflation (i.e. expectations trap)? Explain in terms of a Phillips Curve diagram.arrow_forward
- 3. Is the above model consistent with the policy ineffectiveness proposition? How does the policy implication of the model differ from that of the traditional static AD-AS model with exogenous expectations or adaptive expectations? Explain.arrow_forward(i) Discuss the Lucas Critique. (ii) With the help of a diagram, show the implications of Rational Expectations for the Phillips curve.arrow_forwardRational vs Adaptive Expectations. How are they both different from the assumption we have used up to this point? What are the policy implications of one versus the other?arrow_forward
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