Suppose that the Fed expects to increase the money supply by $54 billion,but economic agents expect that the increase will be closer to $81 billion.Using rational expectations theory,the result will be ______________ Real GDP and a ________________ price level.

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals make predictions using all available information and economic principles. In this case, economic agents' expectations of a higher increase in the money supply than the Fed's expectation would lead them to anticipate inflationary pressures, which would lead to an increase in the price level. As a result, producers would likely produce less due to the expectation of higher input costs, leading to lower real GDP. Therefore, the result would be lower real GDP and a higher price level.

Suppose That the Fed Expects to Increase the Money Supply