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 self-correcting tendency of the economy means that falling inflation eventually eliminates:
A. exogenous spending. B. recessionary gaps. C. expansionary gaps. D. unemployment.
If for a given year nominal GDP is $2000 billion and real GDP is $1500 billion, then the GDP price index is
A) 100. B) 1.33. C) 750. D) 0.75. E) 133.
In the long run, an increase in productivity would cause output to ________ and the aggregate price level to ________
A) fall; rise B) fall; fall C) rise; fall D) rise; rise
Railroad deregulation led to higher prices for railroad service
Indicate whether the statement is true or false