Question 1

According to rational expectations theory, what information do businesses and workers use when they form their expectations regarding inflation?
A)Recent events and data.
B)Keynesian and monetarist models.
C)Forecasts by public-and private-sector economists.
D)All the relevant information that is available.

Accepted Answer

Rational expectations theory posits that businesses and workers use all available relevant information to form their expectations about future economic variables, including inflation.

Question 2

Which of the following models emphasizes the importance of credible, predictable government policies for maintaining full employment with low inflation?
A)The monetarist model.
B)The Keynesian model.
C)The supply-side model.
D)The rational expectations model.

Accepted Answer

The rational expectations model emphasizes the importance of credible and predictable government policies, as it assumes that people use all available information to make economic decisions, anticipating the effects of policy changes.

Question 3

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will:
A)ignore the policy until it exerts an observable impact on prices, output, and employment.
B)quickly take steps to adjust their decision making in light of the more expansionary policies.
C)be fooled at the outset but eventually adjust their decision making in accordance with the change in policy.
D)be unaware that this policy change has been implemented until a higher rate of inflation is observed.

Accepted Answer

The answer of If the government accelerates money supply growth...

Question 4

The rational expectations hypothesis indicates that people:
A)pay little attention to policy when forming their expectations about the future.
B)expect the next period to be pretty much like the recent past, regardless of policy changes.
C)will always be able to forecast the future accurately.
D)change their expectations about the future if policy changes.

Accepted Answer

The rational expectations hypothesis suggests that people will change their expectations about the future if policy changes. This means that people take into account policy changes and adjust their expectations accordingly. Option A and B suggest that people do not pay attention to policy changes or expect the future to be similar to the recent past regardless of policy changes, which contradicts the rational expectations hypothesis. Option C is also incorrect as it is highly unlikely that people will always be able to accurately forecast the future.

Question 5

The hypothesis that people use all available information to predict the future is known as:
A)rational expectations.
B)adaptive expectations.
C)lagged expectations.
D)trend expectations.

Accepted Answer

Rational expectations theory suggests that individuals use all available information, including past and current data, to make predictions about future events.

Question 6

The rational expectations theory indicates that expansionary policy will:
A)stimulate real output in the long run but not in the short run.
B)expand real output and employment if the public quickly anticipates the effects of the expansionary policy.
C)equalize real and nominal interest rates during lengthy periods of inflation.
D)fail to increase employment because individuals will anticipate it and take actions that will offset its impact.

Accepted Answer

According to the rational expectations theory, individuals will anticipate expansionary policy and take actions that will offset its impact. Therefore, expansionary policy will fail to increase employment.

Question 7

The proponents of rational expectations believe that:
A)there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy.
B)macro-policies that stimulate demand and place upward pressure on the general level if prices will temporarily increase output and employment.
C)the inflationary side effects of expansionary policies will be anticipated quickly, and therefore, even their short-run effects on real output and employment will be minimal.
D)discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.

Accepted Answer

Proponents of rational expectations believe that people are able to anticipate the effects of macro-policy changes quickly and accurately. Therefore, expansionary policies that lead to inflation will be anticipated and their short-run effects on output and employment will be minimal.

Question 8

According to the theory of rational expectations,
A)workers' experience tells them that government action to lower unemployment will not affect inflation.
B)consumers and investors generally behave so that rationally formed government attempts to stimulate aggregate demand have their desired effects.
C)policy goals can be achieved easily in the short run.
D)workers' wage demands include anticipated inflation.
E)expansionary monetary policy will lead to permanent interest rate declines.

Accepted Answer

Rational expectations theory suggests that workers and other economic agents use all available information, including anticipated inflation, to make decisions, such as wage demands.

Question 9

According to rational expectations theory, which of the following is the best approach to lower the inflation rate?
A)Preannounced stable government policies.
B)Unpredictable government policies.
C)First predictable and then unpredictable government policies.
D)None of these.

Accepted Answer

Rational expectations theory suggests that individuals and firms make decisions based on all available information, including anticipated government policies. Preannounced stable government policies allow economic agents to adjust their expectations and behaviors accordingly, leading to more effective control of inflation.

Question 10

This school of thought argues that because people anticipate the consequences of announced government policy and incorporate these anticipated consequences into their present decision making, people end up undermining the government policy. What is it?
A)Neo-Keynesian.
B)Keynesian.
C)Monetarist.
D)Supply-side.
E)Rational expectations.

Accepted Answer

The Rational Expectations theory suggests that individuals use all available information to predict future events and adjust their behavior accordingly, often neutralizing the intended effects of government policy.

Question 11

If people behave according to rational expectations theory, people would expect the rate of inflation this year to be:
A)the same as last year.
B)zero, regardless of the rate last year.
C)the rate based on predictable monetary and fiscal policies.
D)All of these.

Accepted Answer

Rational expectations theory suggests that people use all available information, including predictable monetary and fiscal policies, to forecast future economic variables like inflation.

Question 12

Which of the following groups believes that government policy is undermined by people's incorporation of the anticipated consequences of the policy into their present decisions?
A)Classical school.
B)Keynesian school.
C)Neo-Keynesian school.
D)Rational expectations school.
E)Supply-side school.

Accepted Answer

The Rational Expectations School believes that individuals and firms make decisions based on their rational outlook, available information, and past experiences. They anticipate the effects of government policies and adjust their behavior accordingly, potentially undermining the intended effects of those policies.

Question 13

The belief that the government can do absolutely nothing in either the short run or the long run to reduce the unemployment rate, because people will anticipate the government's actions, is held by the:
A)rational expectations school.
B)neo-Keynesian school.
C)classical school.
D)supply-side school.
E)Keynesian school.

Accepted Answer

The rational expectations school believes that individuals and firms use all available information to anticipate government actions, rendering policy interventions ineffective in reducing unemployment.

Question 14

According to rational expectations theory,
A)there is absolutely nothing government can do, even in the short run, to reduce the economy's unemployment rate.
B)the government can use fiscal policy such as increased government spending or lower tax rates to reduce unemployment.
C)a modern extension of Keynesian economics exists.
D)discretionary fiscal policy is essential for prolonged growth.
E)market participants can be fooled in the long run by monetary and fiscal policy rules.

Accepted Answer

Rational expectations theory suggests that individuals and firms use all available information to make economic decisions, implying that government interventions like fiscal policy cannot systematically reduce unemployment, even in the short run, because people will anticipate the effects of these policies.

Question 15

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase:
A)prices but not real output in the short run.
B)real output but not prices in the short run.
C)real output in the long run but not in the short run.
D)real output in both the long run and the short run.

Accepted Answer

According to the rational expectations hypothesis, individuals will anticipate the shift to a more expansionary policy and adjust their expectations accordingly. This means they will expect prices to increase in the future, which will lead them to increase prices immediately. However, in the short run, there may not be enough time for firms to adjust their output levels, so real output will not increase in the short run. Therefore, the answer is A, prices will increase but not real output in the short run.

Question 16

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the price level to move: A)directly from 100 to 110 and then remain at 110. B)directly from 100 to 105 and then remain at 105. C)from 100 to 105 initially and then eventually move back to 100. D)from 100 to 105 initially and then eventually move to 110.

Accepted Answer

The answer of Exhibit 17-2 Aggregate demand and aggregate supply...

Question 17

According to rational expectations theory, predictable expansionary monetary and fiscal policies to reduce the unemployment rate are:
A)desirable because the result is to lower inflation.
B)harmful because the only result is higher inflation.
C)ineffective on the price level.
D)None of these.

Accepted Answer

Rational expectations theory suggests that individuals and firms will anticipate the effects of expansionary policies, leading to adjustments in wages and prices that result in higher inflation without reducing unemployment.

Question 18

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the economy to move: A)directly from E₁ to E₃ and then remain at E₃. B)directly from E₁ to E₂ and then remain at E₂. C)from E₁ to E₂ initially and then eventually move back to E₁. D)from E₁ to E₂ initially and then eventually move to E₃.

Accepted Answer

The answer of Exhibit 17-2 Aggregate demand and aggregate supply...

Question 19

"Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate." This statement best illustrates the:
A)Keynesian theory.
B)rational expectations theory.
C)incomes policy.
D)supply-side theory.

Accepted Answer

The statement describes the rational expectations theory, which suggests that individuals make economic decisions based on their expectations of future government policies and economic conditions. Therefore, preannounced, stable policies for low money supply growth and a balanced budget would lead individuals to expect lower inflation rates and adjust their behavior accordingly. This is seen as the most effective way to reduce inflation according to the rational expectations theory.

Question 20

The rational expectations hypothesis implies that discretionary macro-policy will:
A)be ineffective, even in the short run.
B)be effective in the short run but ineffective in the long run.
C)be effective both in the short run and long run.
D)make it possible to trade-off a higher rate of inflation for a lower rate of unemployment.

Accepted Answer

The rational expectations hypothesis suggests that individuals use all available information to form expectations about economic variables, making discretionary macro-policy ineffective as people anticipate and counteract policy effects.

Quiz 17: The Phillips Curve and Expectations Theory

According to rational expectations theory, what information do businesses and workers use when they form their expectations regarding inflation?

Which of the following models emphasizes the importance of credible, predictable government policies for maintaining full employment with low inflation?

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will:

The rational expectations hypothesis indicates that people:

The hypothesis that people use all available information to predict the future is known as:

The rational expectations theory indicates that expansionary policy will:

The proponents of rational expectations believe that:

According to the theory of rational expectations,

According to rational expectations theory, which of the following is the best approach to lower the inflation rate?

This school of thought argues that because people anticipate the consequences of announced government policy and incorporate these anticipated consequences into their present decision making, people end up undermining the government policy. What is it?

If people behave according to rational expectations theory, people would expect the rate of inflation this year to be:

Which of the following groups believes that government policy is undermined by people's incorporation of the anticipated consequences of the policy into their present decisions?

The belief that the government can do absolutely nothing in either the short run or the long run to reduce the unemployment rate, because people will anticipate the government's actions, is held by the:

According to rational expectations theory,

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase:

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause the price level to move:

According to rational expectations theory, predictable expansionary monetary and fiscal policies to reduce the unemployment rate are:

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause the economy to move:

"Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate." This statement best illustrates the:

The rational expectations hypothesis implies that discretionary macro-policy will:

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the price level to move:

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the economy to move: