Question 1

The rational expectations hypothesis is based on the assumption that

Accepted Answer

The rational expectations hypothesis assumes that individuals combine their past knowledge and experience with their own judgment about future policy effects and changes when forming their expectations. This means that individuals are forward-looking and consider the possible outcomes of policy actions before making decisions. Option B is incorrect because it suggests that individuals do not look ahead, which contradicts the rational expectations hypothesis. Options C and D are completely unrelated to the rational expectations hypothesis.

Question 2

A hypothesis that assumes that people combine the effects of past policy changes on economic events and their own judgment about future effects of current and future policy changes is known as

Accepted Answer

This hypothesis is known as rational expectations. It assumes that individuals use all available information, including their past experiences and their expectations about future policy changes, to form their economic decisions.

Question 3

According to the theory based on rational expectations and flexible wages and prices,

Accepted Answer

The theory based on rational expectations and flexible wages and prices suggests that neither fiscal nor monetary policy can influence real GDP in the long run. This is because individuals and businesses adjust their expectations and actions in response to policy changes, neutralizing the effects of these policies on real output.

Question 4

-Refer to the above figure.The rational expectations hypothesis implies that an anticipated decrease in aggregate demand from  to  will

Accepted Answer

The answer of 
-Refer to the above figure.The rational expectations...

Question 5

The hypothesis suggesting that people combine the effects of past policy changes on economic variables with their own judgment about the future effects of current and future economic policy is referred to as the

Accepted Answer

The hypothesis suggesting that people combine the effects of past policy changes on economic variables with their own judgment about the future effects of current and future economic policy is known as the rational expectations hypothesis. It assumes that individuals make predictions based on all available information, including their own knowledge and experience, and that they use this information to make rational decisions about their behavior. This hypothesis has important implications for macroeconomic policy, as it suggests that policy changes must take into account the expectations of individuals in the economy if they are to be effective.

Question 6

-Refer to the above figure.The rational expectations hypothesis implies that an anticipated increase in aggregate demand from  to  will

Accepted Answer

The answer of 
-Refer to the above figure.The rational expectations...

Question 7

The rational expectations hypothesis suggests that

Accepted Answer

The rational expectations hypothesis posits that individuals make predictions about the future based on all available information, including their perceptions of government policies. As a result, anticipated policy actions are likely to have little impact on the economy as individuals will adjust their behavior accordingly. Therefore, anticipated fiscal and monetary policy actions are not likely to achieve their stated aims.

Question 8

The idea that policy actions have no real effects in the short run if they are anticipated and no real effects in the long run is called the

Accepted Answer

The statement describes the policy irrelevance proposition, which argues that anticipation of policy actions cancels out any short-term effects and that markets will ultimately adjust to negate any long-term effects. This proposition challenges Keynesian theories that advocate for government intervention in the economy.

Question 9

Which of the following holds that economic decision making on all levels is unbiased and is based on all available information?

Accepted Answer

Rational expectations based theory holds that economic decision making is unbiased and is based on all available information, assuming that individuals are rational and perfectly informed. This theory suggests that individuals make optimal decisions based on their rational expectations of future events, including changes in economic policy or market conditions. It is a commonly used framework in macroeconomics and is often employed in the formation of economic policies.

Question 10

According to a theory that relies on the rational expectations hypothesis and the assumption that wages and prices are flexible,why do anticipated expansionary monetary actions NOT boost real GDP?

Accepted Answer

The answer of According to a theory that relies on...

Question 11

Adding the assumption of pure competition and complete flexibility of all prices and wages to the rational expectations hypothesis yields a theory that provides support for

Accepted Answer

The assumption of pure competition and complete flexibility of all prices and wages implies that the economy is self-correcting and will always move towards the equilibrium. This means that active or discretionary policy making is unnecessary as the market will always adjust to any shocks or changes on its own. Therefore, the theory supports passive policy making.

Question 12

The rational expectations hypothesis states that

Accepted Answer

The rational expectations hypothesis states that economic actors incorporate past and present economic information into their decision making, leading to rational expectations about the future. It does not make assumptions about individuals always behaving rationally, prices adjusting in a downward direction, or consumers not understanding the effects of monetary and fiscal policy.

Question 13

The policy irrelevance proposition suggests that the policy effects on the economy primarily occur as a result of

Accepted Answer

The policy irrelevance proposition suggests that policy actions have little to no effect on the economy, and any effects that do occur are due to mistakes or misjudgment of policies. This idea challenges the traditional view that government policies have a significant impact on economic outcomes. Therefore, choice B is the best answer.

Question 14

The rational expectations hypothesis suggests that if wages and prices are flexible,

Accepted Answer

The rational expectations hypothesis posits that individuals form expectations about the future based on all available information, including anticipated policy changes. Therefore, anticipated monetary policy actions are already factored into decision-making, affecting nominal variables like the price level or inflation rate, but not real variables such as output or employment, which adjust based on new, unanticipated information.

Question 15

The rational expectations hypothesis is based on all the following assumptions EXCEPT

Accepted Answer

The rational expectations hypothesis assumes that individuals have a sound understanding of how the economy operates, use their knowledge of past and present economic conditions, and exercise judgment about effects of future policy actions. However, it does not assume that prices are sticky, as this is a separate assumption in some economic models.

Question 16

Those who accept both the rational expectations hypothesis and the assumption of flexibility of wages and price would likely argue that

Accepted Answer

Accepting both the rational expectations hypothesis and the assumption of flexibility of wages and prices would lead one to believe that active policy making does not contribute to economic stability. This is because any attempts to manipulate the economy with policies will be met with rational responses from individuals and firms, who will adjust their behavior accordingly. Therefore, the best choice is B.

Question 17

One implication of coupling the rational expectations hypothesis with the assumption of flexible wages and prices is that

Accepted Answer

The answer of One implication of coupling the rational expectations...

Question 18

-In the above figure,if we start at  and  ,and the money supply increases unexpectedly,what would be the short-run equilibrium even with rational expectations?

Accepted Answer

The answer of 
-In the above figure,if we start at...

Question 19

The proposition that policy actions have no real effects in the short run if the policy actions are anticipated is known as

Accepted Answer

The policy irrelevance proposition states that if policy actions are anticipated, they will have no real effects in the short run. This is because individuals and firms will adjust their behavior in anticipation of the policy, negating any short-term effects.

Question 20

The policy irrelevance proposition implies that

Accepted Answer

The policy irrelevance proposition suggests that anticipated monetary policy actions (such as changes in interest rates) do not generate changes in real GDP. This means that even if the central bank announces a change in interest rates, if it is expected by the public, it will have no effect on the economy. Therefore, the correct option is D - anticipated monetary policy actions are ineffective in generating changes in real GDP.

Quiz 17: Stabilization in an Integrated World Economy