Chicago School of Economics

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Questions and Answers

What primary shift in economic focus occurred in the United States during the 1970s and early 1980s, challenging Keynesian economics?

A growing emphasis on controlling inflation, influenced by thinkers like Fisher and Friedman. (correct)
Increased government spending on social programs to combat poverty.
A renewed focus on maintaining low unemployment through fiscal policy.
Deregulation of industries to stimulate economic growth and competition.

What was a central argument made by the new classical economists regarding the relationship between inflation and unemployment?

There is a stable, long-term trade-off where lower unemployment requires accepting higher inflation.
A temporary trade-off exists only in the short run, and that in the long run, there's no trade-off. (correct)
Wage and price controls are necessary to manage both inflation and unemployment simultaneously.
Fiscal policy is ineffective in managing either inflation or unemployment.

Which of the following concepts, heavily discussed in contemporary economics textbooks, is associated with the new classical macroeconomic perspective?

The multiplier effect of government spending.
A natural rate of unemployment. (correct)
The liquidity trap.
The paradox of thrift.

Chicago School theories, such as human capital and job search, are most likely to be found in which field of economics?

Contemporary labor economics. (A) Signup and view all the answers

Which economist connected with the Chicago School is renowned for his work on the theory of the consumption function?

Milton Friedman. (B) Signup and view all the answers

Milton Friedman's academic career was primarily associated with which university?

University of Chicago. (D) Signup and view all the answers

When did Milton Friedman serve as the president of the American Economic Association?

1967 (B) Signup and view all the answers

In which year did Milton Friedman receive the Nobel Prize in Economics?

1976 (D) Signup and view all the answers

According to the Chicago School of Economics, what is the primary driver of changes in nominal gross domestic product?

Direct changes in the money stock. (A) Signup and view all the answers

What is the Chicago School's perspective on the effectiveness of fiscal policy?

Fiscal policy is ineffective unless accompanied by changes in the money supply. (D) Signup and view all the answers

What is the Chicago School's stance on the cause of inflation?

Inflation is fundamentally a monetary phenomenon. (B) Signup and view all the answers

Which of the following reflects the Chicago School's view on government intervention in the economy?

Government intervention is inherently inefficient and often serves the interests of specific groups rather than the public. (A) Signup and view all the answers

According to the Chicago School, how do observed prices and wages generally relate to their long-run competitive levels?

Observed prices and wages in general tend to be good approximations of their long-run competitive ones. (D) Signup and view all the answers

According to the Chicago School, how can externalities best be minimized?

By establishing clear property rights and encouraging private negotiations. (B) Signup and view all the answers

How does the Chicago School view institutional arrangements like seniority pay and union contracts?

As arrangements that usually exist because the parties involved see them as being efficient. (C) Signup and view all the answers

According to the content, who benefits from the Chicago School's views on economic policy?

Society at large through maximum economic freedom and individual well-being. (B) Signup and view all the answers

According to the concept of the long-run Phillips curve, what is the consequence of monetary authorities persistently trying to maintain unemployment below the natural rate?

An upward spiral of inflation with no lasting reduction in unemployment. (A) Signup and view all the answers

Why does the short-run Phillips curve shift upward when individuals adjust their inflation expectations?

Because higher expected inflation gets factored into wage demands, increasing labor costs. (D) Signup and view all the answers

In the context of the Phillips curve, what is the initial impact of an unexpected increase in the money supply on firms?

Increased product prices relative to labor costs. (C) Signup and view all the answers

Following an increase in inflation expectations, what adjustments occur in labor contracts and how do these adjustments affect firms' employment decisions?

Contracts are renegotiated with higher nominal wages, leading firms to decrease employment. (A) Signup and view all the answers

What does the vertical long-run Phillips curve imply for the ability of monetary policy to manage unemployment?

Monetary policy can only affect inflation in the long run, not unemployment. (C) Signup and view all the answers

Assume the economy is at its natural rate of unemployment with stable inflation. If the monetary authority implements expansionary policy, what sequence of events is most likely to occur?

Unemployment falls, inflation rises, and the short-run Phillips curve shifts upward. (A) Signup and view all the answers

What is the primary factor that causes the economy to move from one point on a short-run Phillips curve to a point on a different short-run Phillips curve?

Changes in expected rates of inflation. (C) Signup and view all the answers

If policymakers attempt to exploit a perceived short-run trade-off between inflation and unemployment, what is the most likely long-term outcome for the economy?

Higher inflation and unemployment returning to its natural rate. (D) Signup and view all the answers

How do individuals adjust their expectations about future inflation under the adaptive expectations theory?

By determining expectations based on past and present inflation, adjusting as new events occur. (C) Signup and view all the answers

According to Robert Lucas, how do market participants utilize information to predict future price level changes?

They reflect on past errors, use all available information, and eliminate regularities in prediction errors. (B) Signup and view all the answers

What is the immediate impact of expansionary fiscal and monetary policies, according to the rational expectations framework?

An immediate increase in inflation expectations and adjustments in resource and financial markets. (B) Signup and view all the answers

How do resource and financial markets react to predicted inflation under rational expectations?

Workers receive higher nominal wages, sellers receive higher prices, and lenders receive higher nominal interest rates. (C) Signup and view all the answers

According to the rational expectations perspective, what is the effect of expansionary fiscal and monetary policy?

Ineffective due to the immediate adjustment of inflation expectations. (C) Signup and view all the answers

In the context of Friedman's Phillips Curve, how does the economy move when expansionary policies are implemented, assuming rational expectations?

The economy moves directly to a higher inflation rate along the long-run Phillips Curve. (A) Signup and view all the answers

What is a key difference between adaptive and rational expectations?

Adaptive expectations assume people never learn from their mistakes, while rational expectations assume they do. (A) Signup and view all the answers

How might an economy with rational expectations respond to a surprise announcement of a new, credible anti-inflation policy?

Inflation expectations would immediately decrease, leading to a rapid decline in actual inflation. (C) Signup and view all the answers

According to Lucas's aggregate supply analysis, what is the primary impact of an anticipated increase in aggregate demand on real output in the long run?

Real output remains unchanged, with only inflation occurring. (B) Signup and view all the answers

How did Gary Becker broaden the scope of economic analysis?

By applying economic principles to traditional sociological, political, and anthropological domains. (C) Signup and view all the answers

How do firms respond to an anticipated inflationary outcome caused by the Federal Reserve according to the new classical macroeconomics?

Firms recognize that their increased prices are part of general inflation and their profits remain unchanged. (D) Signup and view all the answers

What is the significance of the long-run aggregate supply curve in Lucas's analysis when increases in aggregate demand are anticipated?

It is the only relevant aggregate supply curve as the economy moves directly to long-run equilibrium. (C) Signup and view all the answers

What concept did Gary Becker introduce in his book Human Capital (1964)?

The modern, generalized theory of investment in human capital. (B) Signup and view all the answers

What is a key characteristic of the economy according to Lucas's new classical macroeconomics?

It is self-correcting, similar to the views of classical economists. (D) Signup and view all the answers

What immediate effect does the Fed's publicly announced action have on firms that anticipate inflation?

Firms anticipate the action and see that higher prices are part of the general inflation. (A) Signup and view all the answers

In the context of Lucas’s Aggregate Supply Analysis and an anticipated increase in aggregate demand, which of the following simultaneous shifts occur?

Short-run aggregate supply curve shifts leftward, and aggregate demand increases rightward. (A) Signup and view all the answers

According to the theory of investment in human capital, what is the primary factor influencing an individual's decision to invest in a college education?

The expected return on investment, which compares the present value of increased earnings with the costs of college. (B) Signup and view all the answers

What are the two types of costs associated with attending college?

Direct costs, such as tuition and books, and indirect costs, such as foregone earnings. (D) Signup and view all the answers

In the context of human capital theory, what does 'foregone earnings' refer to when considering the costs of attending college?

The potential income an individual could have earned if they had worked instead of attending college. (B) Signup and view all the answers

According to Becker, what is the key difference between general and specific training?

General training increases productivity in multiple employment settings, while specific training enhances productivity only within the firm providing it. (B) Signup and view all the answers

How would an individual determine if investing in a college education is worthwhile based on human capital theory?

By calculating the net present value of the increased earnings resulting from a college degree and comparing it to the present value of the costs. (C) Signup and view all the answers

If the net present value of attending college is negative, according to human capital theory, what decision would a rational individual make?

Forgo college and enter the workforce directly. (C) Signup and view all the answers

Suppose a company invests heavily in specific training for its employees. What is the likely outcome if these employees leave the company?

The employees will likely experience a decrease in their marginal productivity, as their skills are less valuable to other firms. (C) Signup and view all the answers

Which of the following scenarios best illustrates an investment in general training?

A manufacturing firm pays for its workers to attend a workshop on improving teamwork and communication skills. (A) Signup and view all the answers

Flashcards

Money Stock Changes

Changes in the money supply directly affect nominal GDP.

Fiscal Policy Ineffectiveness

Fiscal policy needs money supply changes to be effective, especially with rational expectations.

Cost-Push Inflation

The theory claiming inflation is caused by rising costs is invalid; inflation is a monetary phenomenon.