According to adaptive expectations theory, expansionary monetary and fiscal policies to reduce the unemployment rate are:
a. useless in the long run.
b. useless in the short run.
c. ineffective on the price level.
d. None of these.
QUESTION 2As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer goods. This situation contributed to which bias in the consumer price index?
a. Substitution bias.
b. Transportation bias.
c. Quality bias.
d. Indexing bias.
QUESTION 3The greater the marginal propensity to consume (MPC) in the economy, the greater the spending multiplier.
a. True
b. False
Indicate whether the statement is true or false
QUESTION 4Under adaptive expectations theory, people persistently:
a. underestimate inflation when it is slowing down.
b. overestimate inflation when it is accelerating.
c. underestimate inflation when it is accelerating.
d. adapt to the prevailing inflation rate.
QUESTION 5Which of the following would understate the consumer price index?
a. Substitution bias.
b. Deteriorating quality of products.
c. Improving quality of products.
d. Law of demand bias.
QUESTION 6Following Keynesian economics, and assuming a marginal propensity to consume (MPC) of 0.80, an increase in federal government spending of 100 billion at below full employment would be expected to shift the aggregate demand curve by 500 billion to the right.
a. True
b. False
Indicate whether the statement is true or false
QUESTION 7Under adaptive expectations theory, people expect the rate of inflation this year to be:
a. zero, regardless of the rate last year.
b. the same as last year.
c. the rate based on predictable and fiscal policies.
d. All of these.
QUESTION 8Suppose a market basket of goods and services costs 400 in the base year and 500 this year. The consumer price index (CPI) for this year is:
a. 25.
b. 100.
c. 125.
d. 500.
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