Suppose that the Fed expects to increase the money supply by $49 billion,but economic agents expect that the increase will be closer to $75 billion.Using rational expectations theory,the result will be ______________ Real GDP and a ________________ price level.

Question

Quizplus · Accepted Answer

According to rational expectations theory, economic agents will anticipate the Fed's actions and adjust their behavior accordingly. In this case, economic agents expect the Fed to increase the money supply by $75 billion, which is more than the Fed's actual increase of $49 billion. This will lead to an increase in aggregate demand, which will in turn lead to higher real GDP and a higher price level.

Suppose That the Fed Expects to Increase the Money Supply