Question : 18.4   New Classical Macroeconomics 1) Traditional macroeconomic models assume that people’s : 1381259

 

18.4   New Classical Macroeconomics

 

1) Traditional macroeconomic models assume that people’s expectations of inflation

A) are determined by looking at all the relevant information and forecasting the future inflation rate.

B) will be zero in the future.

C) are set by assuming a continuation of present inflation.

D) are set by merely guessing what the future inflation rate will be.

 

2) The new classical theoretical critique of the existing macroeconomic models is based on

A) the way people form their expectations.

B) the nature of the tradeoff between inflation and growth.

C) wages and labor market equilibrium.

D) the link between the money market and the goods market.

3) The problem with the traditional macroeconomic treatment of expectations of inflation is that

A) the model is not consistent with the microeconomic assumption that individuals are rational, forward-looking people.

B) the model assumes that individuals will merely guess at what the inflation rate will be.

C) in the model people always assume that inflation will be zero.

D) the way people formulate expectations in that model assumes that individuals are highly sophisticated in their economic thinking.

 

4) The rational-expectations hypothesis suggests that the forecasts that people make concerning future inflation rates

A) are always correct.

B) consistently overestimate the actual rate of inflation in the future.

C) are correct on average, but are subject to errors that are distributed randomly.

D) consistently underestimate the actual rate of inflation in the future.

 

5) The rational-expectations hypothesis suggests that errors in forecasting future inflation rates are due to

A) random, unpredictable events.

B) the fact that people assume that the current inflation rate will continue into the future.

C) the fact that people consistently underestimate future inflation.

D) the fact that people consistently overestimate future inflation.

 

6) People are said to have rational expectations if they

A) use all available information in forming their expectations.

B) assume that this year’s inflation rate will be equal to the average inflation rate over the past 10 years.

C) merely guess at the inflation rate.

D) assume that this year’s inflation rate will be the same as last year’s inflation rate.

7) If firms have rational expectations and if they set prices and wages on this basis, then prices and wages

A) will always be at market-clearing levels.

B) will, on average, be set at market-clearing levels.

C) will always be above market-clearing levels.

D) will never be set at market-clearing levels.

 

8) If firms have rational expectations and if they set prices and wages on this basis, then on average

A) prices and wages will be set at levels that do not clear the goods and labor markets.

B) prices will be set at levels that ensure equilibrium in the goods market, but wages will be set at levels that do not clear the labor market.

C) prices and wages will be set at levels that ensure equilibrium in the goods and labor markets.

D) wages will be set at levels that ensure equilibrium in the labor market, but prices will be set at levels that do not clear the goods market.

 

9) If all firms have rational expectations and wages and prices are flexible, there will be

A) high unemployment because firms set their wages above the equilibrium wage rate.

B) a shortage of labor because firms set their wage below the equilibrium wage rate.

C) no unemployment.

D) high unemployment because firms know the “true model.”

 

10) According to the rational expectation hypothesis, disequilibrium may exist in the labor market because

A) of unpredictable shocks.

B) firms don’t know the “true model.”

C) workers don’t know the “true model.”

D) of predictable shocks.

 

 

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