Adaptive expectations theory O a) holds that people's expectations of future inflation are based on their most recent experiences. O b) explains why prices are flexible in the long run. Oc) holds that people form expectations perfectly. d) explains the relationship between the unemployment rate and inflation. Oe) holds that people form expectations on the basis of all available information.
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- People are said to have rational expectations if they Select one: a. merely guess at the inflation rate b. assume that this year's inflation rate will be equal to the average inflation rate over the past 10 years O c. use all available information in forming their expectations about inflation O d. assume that this year's inflation rate will be the same as last year's inflation rateThe proponents of rational expectations argue that it is possible to reduce inflation without causing any recession if: (i) The policymakers' plan to reduce inflation is announced before people form their expectations. (ii) The policymakers' plan to reduce inflation adjusts when people change their expectations. (iii) The people believe the policy announcement on inflation reduction. Either (i) or (ii) Both (i) and (iii) O c. c. Either (i) or (iii) O d. Both (i) and (ii) a. O b.1. Are the implications of the rational and adaptive expectations hypotheses different in the short-run? A.No, because under both theories people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. B.Yes, because under adaptive expectations there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the rational expectations implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. C.Yes, because under rational expectations theory there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the adaptive expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. D. No, because under both theories, there is a significant time…
- Suppose that an economy has the Phillips curvep=p-1 - O.S(u - 0.06),a) What is the natural rate of unemployment?b) Graph the short-run and long-run relationships between inflation and unemployment.c) How much cyclical unemployment is necessary to reduce inflation by S percentage points?d) Using Okun's law, compute the sacrifice ratio e.e)Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give Iwoscenarios that will achieve that goal.Consider the Friedman-Phelps model of the Phillips Curve as discussed in lecture. Assume the economy is currently at Y-full employment. When the Fed sells government securities to the public, and there are no other exogenous shocks to the economy, which one of the following is predicted to happen? The actual inflation rate increases, and the unemployment rate increases permanently. O The actual inflation rate increases, and the unemployment rate increases first and then gradually goes back to the natural rate of unemployment. O The actual inflation rate decreases, and the unemployment rate increases first and then gradually goes back to the natural rate of unemployment. The actual inflation rate decreases, and the unemployment rate increases permanently. The actual inflation rate decreases, and the unemployment rate decreases first and then gradually goes back to the natural rate of unemployment.Which of the following situations would lead to actual inflation of 3%? A. future inflation is 1%; output-gap inflation is 0%; supply-shock inflation is 2% B. future inflation is 3%; output-gap inflation is 3%; supply-shock inflation is 3% C. future inflation is 1.5%; output-gap inflation is 1.5%; supply-shock inflation is 3% D. future inflation is 0%; output-gap inflation is 3%; supply-shock inflation is - 3% E. future inflation is 3%; output-gap inflation is 0%; supply-shock inflation is - 3%
- Stagflation, that is, high unemployment combined with high inflation Multiple Choice O O о O cannot persist, since the economy eventually will return to full employment can only occur if expansionary monetary policy is combined with restrictive fiscal policy is inconsistent with the inflation-expectations-augmented Phillips curve cannot occur as long as the expected inflation rate is above the actual inflation rate can only occur during the period of economy expansionUsing 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.When does the Phillips curve look like this? TU + UN U The diagram has unemployment on the horizontal axis and inflation on the vertical axis. There is a place marked on the horizontal axis marked as UN. There is a line starting at the origin that goes out and up from the origin at a 45 degree angle and continues indefinitely. There is nothing else on the diagram. When people are not changing their expectation of inflation. It never looks like this. When people have rational expectations. O When people have adaptive expectations.
- The accompanying graph depicts the Short-Run Phillips O Curve (SRPC) when the public expects no inflation in the economy. Macmillan Learning a. According to this SRPC, what would inflation be if unemployment is 9%? 0 Incorrect b. Please move the SRPC line to reflect what would happen if the public's inflation expectations increased so that they now expect the inflation rate to increase by 2%. c. If the unemployment rate is still 9%, what is the new inflation rate after this change in expectations? % 2 % Inflation rate (%) 7 6 5 4 3 2 1 0 -1 -2 -3 0 1 SRPC 2 3 4 5 6 Unemployment rate (%) 7 8 9 10The text proposes the following model of expected inflation x = (1 - 0) x + 0,-1 What do we know about your process of the formation of expected inflation when 0 = 07 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate. OB. Last year's inflation rate will influence you to revise your estimates for this year's expected rate. OC. Regardless of what inflation was last year, you would expect it to be at the long-run average inflation rate this year. OD. Last year's inflation rate and the long-run average inflation rate have an equal impact on your view of this year's expected rate. What do we know about your process of the formation of expected inflation when 0-17 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate OB. Last year's inflation rate will be the only input for you to revise your estimates for this year's expected rate regardless of…The following graph plots the short-run and long-run Phillips curves (SRPC and LRPC, respectively) for an economy currently experiencing long-run macroeconomic equilibrium at point A, where the natural unemployment rate is 6% and the inflation rate is 8% per year. INFLATION RATE (Percent) 20 18 16 14 12 2 10 8 0 1 2 LRPC Y-Intercept: None 5 A 6 3 4 7 UNEMPLOYMENT RATE (Percent) B 9 SRPC 10 ?