Question

1. Milton Friedman argued that there is a

               a.            permanent downward-sloping Phillips curve.

               b.           temporary downward-sloping Phillips curve.

               c.            temporary upward-sloping Phillips curve.

               d.           permanent upward-sloping Phillips curve.

2.            Milton Friedman argued that the economy is not in long-run equilibrium if the expected inflation rate __________ the actual inflation rate.

               a.            is less than

               b.           is greater than

               c.            equals

               d.           a and b

3.            New classical economists believe that there is

               a.            a short-run tradeoff between inflation and unemployment when policy is unanticipated.

               b.           a short-run tradeoff between inflation and unemployment when policy is correctly anticipated.

c.            no short-run tradeoff between inflation and unemployment when policy is correctly anticipated.

               d.           a and b

               e.            a and c

4.            According to rational expectations theory,

a.            every day is a new day and yesterday's occurrences have no bearing on today's decisions.

b.           when making decisions a person will consider only information based on past experience.

c.            even though a person considers information related to future events as potentially important for decision making, he realizes that such information is unreliable and worthless.

d.           past experience is a good guide for decision making, but so is information related to possible future outcomes.

5.            The difference between new classical theory and new Keynesian theory is that

a.            in new classical theory wages are assumed to be flexible, and in new Keynesian theory wages are assumed to be somewhat inflexible.

b.           in new classical theory wages are assumed to be somewhat inflexible, and in new Keynesian theory wages are assumed to be flexible.

c.            adaptive expectations is the dominant expectations theory in new classical theory, and rational expectations is the dominant expectations theory in new Keynesian theory.

d.           in new Keynesian theory the short-run aggregate supply curve is vertical, and in new classical theory the short-run aggregate supply curve is upward sloping.

Answer 1

The answers are as follows to the given questions.

Q1) (B) Friedman argued that the Philips curve holds only in the short run and the tradeoff disappears in the long run. Thus, it is temporary downward sloping. All other options are wrong as these ideas are not supported by Friedman

Q2) (D)The economy is in a long-run equilibrium only of expected inflation is equal to the expected inflation. Thus, only (c) is incorrect and both (a) and (b) are true

Q3) (E) as there is a short-run tradeoff onlt when the policy is unanticipated. Thus, both (a) and (c) are true and (e) is true

Q4 (D) as the future is always taken in expectation for all decisions and it is important in rational expectations theory. All other options are incorrect as they do not correctly represent rational expectations.