In the rational expectation model, government control over aggregate demand:
A)gives it the power to alter real output and employment even when the effects of government policies are expected.
B)can affect real output in the short-run only if policies are unexpected.
C)has potential to change long-run real output as long as the aggregate supply curve is vertical.
D)has highly unpredictable effects on real output in the long run.

Question

In the rational expectation model, government control over aggregate demand:
A)​gives it the power to alter real output and employment even when the effects of government policies are expected.
B)​can affect real output in the short-run only if policies are unexpected.
C)​has potential to change long-run real output as long as the aggregate supply curve is vertical.
D)​has highly unpredictable effects on real output in the long run.

Quizplus · Accepted Answer

In the rational expectation model, agents form their expectations based on all available information including government policies. Therefore, expected government policies do not have any impact on real output in the long run. However, if government policies are unexpected, they can affect real output in the short run. In the long run, only unanticipated government policy changes can have the potential to change long-run real output.

In the Rational Expectation Model, Government Control Over Aggregate Demand