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27.3Â Â Implications for Stabilization Policy 1) Assuming rational expectations and complete wage and price flexibility, systematic stabilization policy impacts A) real GDP. B) real wages. C) the unemployment rate. D) the inflation rate. 2) Contractual inflexibility is most likely to slow price adjustment in the A) money market. B) capital market. C) real estate market. D) labor market. 3) Keynesians argue that changes in wages will lag price level changes even if expectations are formed rationally because A) workers have very little bargaining power compared with that of management. B) only a small percentage of workers are unionized. C) wages are often set by long-term contracts. D) workers often have incorrect information. 4) Can a Keynesian still believe in an active counter-cyclical policy if she adopts the assumption of rational expectations? A) No, it destroys the case for active policy. B) Yes, so long as she continues to assume wage and price rigidity. C) Yes, if she also adopts the assumption of wage and price flexibility. D) Yes, if she assumes that economic policy shifts are anticipated in advance. 27.4Â Â Inflation, the Phillips Curve, and Credibility 1) According to rational expectations, A) the Fed should focus its policies on interest rates. B) the Fed should focus its policies on inflation. C) the Fed should focus its policies on unemployment. D) the Fed is unable to influence real economic activity. 2) If labor contracts prevent wage flexibility, the aggregate supply curve will be A) vertical. B) horizontal. C) negatively sloped. D) positively sloped. 3) The assumption that wages adjust more slowly than prices implies that the Phillips Curve A) exists in the short-run. B) exists in the long-run. C) is vertical. D) does not exist. 4) If expectations are formed rationally and wages are inflexible in the short run, the short-run aggregate supply curve is A) upward sloping. B) horizontal. C) vertical. D) relatively flat. 5) If expectations are formed rationally and wages are flexible, the aggregate supply curve is A) upward sloping. B) horizontal. C) vertical. D) relatively flat. 6) A contractionary monetary policy can reduce the inflation rate without causing a rise in unemployment if expectations are formed rationally and monetary policy is A) combined with expansionary fiscal policy. B) carried out in total secrecy. C) publicly announced and credible. D) combined with contractionary fiscal policy. 7) A contractionary monetary policy can reduce real GDP if expectations are formed rationally and monetary policy is A) combined with expansionary fiscal policy. B) carried out in total secrecy. C) publicly announced and credible. D) combined with contractionary fiscal policy. 8) An effective way to restore credibility to monetary authorities after a period of hyperinflation is A) the introduction of a new monetary unit. B) the introduction of wage and price controls. C) a reduction in bank reserve requirements. D) the centralization of monetary and fiscal policy under a single governmental unit. 27.5Â Â Interest Rates and Anticipated Monetary Policy 1) In a world of rational expectations, A) an anticipated increase in money supply leads immediately to higher nominal interest rates. B) an anticipated increase in money supply leads immediately to lower nominal interest rates. C) an unanticipated increase in money supply leads immediately to higher nominal interest rates. D) an unanticipated decrease in money supply leads immediately to lower nominal interest rates. 2) In a world of rational expectations, A) an unanticipated increase in money supply leads immediately to lower nominal interest rates. B) an unanticipated increase in money supply leads immediately to higher nominal interest rates. C) an anticipated increase in money supply leads immediately to lower nominal interest rates. D) an anticipated decrease in money supply leads immediately to higher nominal interest rates.