Title: New Classical Economics
Course: TEST Course

Q: The theory of ________ assumes that individuals will use all information available to them to form the most accurate possible expectations about the future.
- adaptive expectations
- Keynesian economics
- rational expectations
A: rational expectations

Q: Which economic theory assumes individuals will use past values of inflation to predict the possible expected future values of inflation?
- rational expectations
- Keynesian economics
- adaptive expectations
A: adaptive expectations

Q: If the theory of rational expectations is correct, then the ________, even in the short run.
- aggregate demand curve should be vertical
- aggregate supply curve should be horizontal
- Phillips curve should be vertical
A: Phillips curve should be vertical

Q: Assuming the theory of rational expectations is accurate, even in the short-run the ________.
- aggregate demand curve is vertical
- aggregate supply curve is horizontal
- Phillips curve is vertical
A: Phillips curve is vertical

Q: When a shift in ________ occurs, rational expectations hold that its impact on output and employment will only be minimal.
- aggregate supply
- wage levels
- aggregate demand
A: aggregate demand

Q: When a shift in aggregate demand occurs, rational expectations hold that ________.
- its impact on employment and output will be exponential
- its impact on employment and output will have no change whatsoever
- its impact on employment and output will only be minimal
A: its impact on employment and output will only be minimal

Q: New classical economists believe that a contractionary monetary policy can be effective
- because households and businesses expect higher interest rate and lower prices, and therefore spend more on consumption and investment.
- because households and businesses expect higher interest rates and lower prices, and therefore do not change their consumption and investment.
- only when households and businesses do not expect higher interest rates or lower prices, and therefore reduce their consumption and investment.
A: only when households and businesses do not expect higher interest rates or lower prices, and therefore reduce their consumption and investment.

Q: According to new classical economists, a contractionary monetary policy is effective
- because businesses and households expect lower prices and higher interest rates, and therefore spend more on investment and consumption.
- because businesses and households expect lower prices and higher interest rates, and therefore continue on with the same level of investment and consumption.
- only because businesses and households are not expecting lower prices and higher interest rates, so they reduce their investment and consumption.
A: only because businesses and households are not expecting lower prices and higher interest rates, so they reduce their investment and consumption.

Q: After reports of the subprime mortgage crisis began to appear in the media, which of the following most likely caused housing prices to fall?
- neoclassical theory
- cyclical expectations
- rational expectations
A: rational expectations

Q: Which of the following more than likely caused housing prices to fall after the media reported about the subprime mortgage crisis?
- neoclassical theory
- cyclical expectations
- rational expectations
A: rational expectations

Q: New classical economists argue that a tax cut does not shift the aggregate demand curve because:
- consumers doubt future government debt will have an effect on future taxes.
- prices are inflexible, so real GDP does not change.
- households reduce their consumption so they can pay afford to pay higher taxes in the future.
A: households reduce their consumption so they can pay afford to pay higher taxes in the future.

Q: According to new classical economists the reason that a tax cut does not shift the aggregate demand curve is:
- households increase their consumption and can pay higher taxes in the future.
- real GDP does not chance because prices are inflexible.
- consumers anticipate the effect of an increase in government debt on future taxes.
A: consumers anticipate the effect of an increase in government debt on future taxes.

Q: New Classical economists believe fiscal policy is ineffective because any increase in government spending will cause:
- private individuals to save less.
- business investment to fall.
- households to spend less.
A: households to spend less.

Q: If, according New Classical economists, fiscal policy is inadequate because any government spending increase causes:
- private individuals to spend more and save less.
- business to decrease their investments.
- most households save rather than spend.
A: most households save rather than spend.

Q: If Ricardian Equivalence theory holds completely true, then any change in budget deficits or budget surpluses would be completely offset by which of the following?
- A change in currency exchange rates.
- A sustained pattern of trade imbalances.
- A corresponding change in private saving.
A: A corresponding change in private saving.

Q: Ricardian equivalence means that changes in
- exports offset any changes in the government deficit.
- imports offset any changes in the government deficit.
- private savings offset any changes in the government deficit.
A: private savings offset any changes in the government deficit.

Q: Suppose you are analyzing data for an economy in which Ricardian equivalence holds true. If the budget deficit increases by 50, then:
- investment will increase by 50 or more.
- investment will decrease by 50 or less.
- private savings will increase by 50 or less.
A: private savings will increase by 50 or less.

Q: Take the scenario where an economist is analyzing data for an economy in which Ricardian equivalence holds true. If there is an increase by 25 in the budget deficit, then:
- investment will increase by 25 or more.
- investment will decrease by 25 or less.
- private savings will increase by 25 or less.
A: private savings will increase by 25 or less.

Q: What is the theory that supports Ricardian Equivalence?
- Cutting taxes has little to no effect on supply or household saving.
- Increased government spending strives to promote and increase household consumption while decreasing the deficit.
- As households make consumption decisions they consider government actions and policies when making adjustments to spending and saving.
A: As households make consumption decisions they consider government actions and policies when making adjustments to spending and saving.

Q: When economists use Ricardian Equivalence, what rational thought supports it?
- Supply and household savings are not affected by tax cuts.
- Increasing household consumption is the goal as government increases spending and decrease household savings.
- Households consider future ramifications of current government policies and adjust their savings/spending accordingly which decreases the effectiveness of fiscal policy.
A: Households consider future ramifications of current government policies and adjust their savings/spending accordingly which decreases the effectiveness of fiscal policy.