Explain why expansionary monetary policy would not result in reduced unemployment rates if workers and firms have rational expectations
What will be an ideal response?
If workers and firms have rational expectations, they anticipate that expansionary monetary policy will increase inflation. The increase in inflation expectations will be incorporated into wage contracts, resulting in no change in the real wage. If there is no change in the real wage, then there will be no change in unemployment and no change in real GDP. As a result, there will be no trade-off between unemployment and inflation. Inflation will rise, but the unemployment rate will not be affected.
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The real business cycle theory is most closely related to
a. Keynesian theory. b. monetarist theory. c. the classical model. d. the new Keynesian model.
Hyperinflation refers to a situation in which:
a. prices are rising extremely rapidly. b. prices are falling extremely rapidly. c. the price level is extremely high. d. the price level is extremely low.
In a perfectly competitive market, a given short-run equilibrium cannot persist into the long run unless the firms are earning (suffering)
a. above-normal profits b. below-normal profits c. economic losses d. economic profits e. just enough profit to cover all the owners' opportunity costs
An event that directly affects firms' costs of production and thus the prices they charge is called
a. a Phillips contraction. b. an inflationary spiral. c. a demand shock. d. a supply shock.