Explain the rational expectations hypothesis
What will be an ideal response?
The rational expectations hypothesis assumes that people base their forecasts about the future values of economic variables on all available past and current information, and that these expectations incorporate their understanding about how the economy operates, including the operation of monetary and fiscal policy. If there is pure competition in all markets and all prices, including wages, are flexible, then the government cannot affect real GDP except by fooling people and fooling people cannot work for long.
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The difference between cost-of-service regulation and rate-of-return regulation is that
A) the former sets prices based on actual costs, and the latter focuses on setting prices such that the firm earns a normal rate of return. B) the latter sets prices first, and then the firm must keep costs in line if it wants to earn a profit, and the former sets price high enough to cover costs. C) the former uses marginal cost pricing and the latter uses average cost pricing. D) the former uses average cost pricing and the latter uses marginal cost pricing.
Suppose a constitutional amendment is passed that mandates a balanced federal budget every year and the President and Congress consistently carry this mandate out. This would be an example of
A) active policy making. B) decisive policy making. C) nondiscretionary policy making. D) cooperative policy making.
Which of the following is not an example of intermediate goods or services?
a. Steel used in the manufacture of cars b. Pizzas bought at a restaurant c. Legal services hired by a public accounting firm d. Glass used to manufacture sunglasses e. Vegetables used by a restaurant
If a firm is price differentiating, then it is
A) producing a homogeneous product. B) charging different prices to different consumers based on differences in marginal costs. C) charging different prices based on quality. D) charging different prices based on advertising costs.