What rationale does rational expectations theory provide for the ineffectiveness of discretionary policies?
What will be an ideal response?
Adherents contend that the aggregate responses of the public to its expectations will render ineffective anticipated discretionary policies. For example, if monetary authorities announce an easy money policy to increase output and employment, the public will expect inflation in the future. Therefore, they will demand higher nominal wages, businesses will increase product prices, and lenders will raise interest rates. These actions will frustrate the attempt of policy makers to expand real output. The only time that policy may be effective is when it is unanticipated, but this is virtually impossible in a society with democratic institutions and free flow of information.
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Once supply side effects are taken into account, tax cuts for labor income can change
i. the supply of labor. ii. potential GDP. iii. the growth rate of potential GDP. A) iii only B) ii only C) i only D) i and ii E) i and iii
If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will
A) rise by 6 percent. B) rise by 2 percent. C) fall by 6 percent. D) fall by 2 percent.
If the Chinese Yuan devalues against the US dollar, then
a. Both the US exporters and Chinese exporters would benefit b. The US exporters would benefit while the Chinese exporters would be hurt c. The US exporters would be hurt while the Chinese exporters would benefit d. Both the US exporters and Chinese exporters would be hurt
Which statement is true?
A. Monopolistic competitors have very elastic demand curves. B. Most monopolistic competitors are very large firms. C. Less than half of all businesses in the United States are monopolistic competitors. D. None of these statements are true.