If the price level increases more rapidly than expected, _____.

If the price level increases more rapidly than expected, _____.
 a. output will decrease
 b. output will increase
 c. output will not change
 d. real wages will increase
 e. unemployment will increase

QUESTION 2

Which of the following is true about rational expectations?
 a. People form expectations on the basis of information about past as well as future actions of policy makers.
  b. Wage agreements do not reflect inflationary expectations if workers expect continued inflation.
 c. Rational people cannot easily anticipate the effects of discretionary policy on the price level and output.
  d. The role of expectations is applicable in the context of monetary policy only.
 e. The effectiveness of a particular government policy is independent of people's expectations.

QUESTION 3

Which of the following macroeconomic variables is most dependent on whether the government pursues an active approach to policy or a passive approach to policy?
 a. Aggregate supply
 b. Aggregate demand
  c. Money demand
 d. Money supply
 e. Interest rate

QUESTION 4

According to the rational expectations school, _____.
 a. on average people have very little idea of what to expect from government policy makers
 b. people form expectations by focusing only on the private sector
 c. changes in the expected price level shift the aggregate demand curve
 d. people do not consider likely government policies when forming expectations, choosing to remain rationally ignorant
  e. people form expectations, in part, by considering the probable future actions of government policy makers

QUESTION 5

According to the rational expectations school, people base their expectations about inflation on:
 a. the announcement of a change in policy.
 b. weighted averages of previous inflation rates, with the most distant getting the heaviest weight.
  c. all information available to them.
 d. changes in monetary policy only.
 e. changes in both monetary and fiscal policy.

QUESTION 6

Which of the following is an outcome of prolonged unemployment?
 a. An improvement in labor skills
 b. An increase in the inflation rate
 c. A rise in potential GDP
 d. A fall in potential GDP
 e. An increase in the size of the labor force

QUESTION 7

Which of the following is not a valid criticism of discretionary fiscal policy?
 a. The implementation of fiscal policy is sometimes difficult.
 b. Time lags in fiscal policy are long.
 c. Fiscal policy works only during periods of stagflation.
 d. Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income.
  e. Fiscal policy might have undesirable long-term effects on aggregate supply.

QUESTION 8

Passive policy advocates rely on the economy's natural ability to correct itself in case of unemployment because of:
 a. the lack of any real concern for those who have no jobs.
 b. the conviction that unemployment is relatively harmless.
 c. the belief that active economic policy is likely to be either ineffective or harmful.
  d. the desire to await further economic data before intervening.
 e. the belief in the law of diminishing returns.