Explain why rational expectations theorists do not support government intervention to alleviate unemployment. Explain their views on the effectiveness of fiscal and monetary policy
They believe that anticipation of either fiscal or monetary policy undermines the policy because workers
are rational enough to learn from experience how government policies effect them and to react to those
policies before they actually take effect. For example, if the government tries to cut unemployment,
workers will expect inflation and will try to prevent inflation losses by demanding higher wages. Any
short-run price-cost gap is closed, thus removing the incentive for firms to hire extra workers. Similarly, if
the Fed uses monetary policy to end a recession, workers and firms will expect inflation to occur, and will
respond instantaneously. Workers will demand higher wages, firms will demand higher prices, and banks
will raise interest rates, leading to a decline in consumer spending and investment by firms. The result will
be a higher price level and no reduction in unemployment.
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Give an example of a tax system where the marginal tax rate would equal the average tax rate
For most of the unemployed, unemployment spells are ________
A) longer than a year B) longer than 10 years C) permanent D) shorter than three months
If the dollar value of paper produced and the total wages paid to labor both rise, value added in the paper industry could be unaltered
Indicate whether the statement is true or false
The existence of a universal law of scarcity creates pressures on societies to
a. use their resources according to government plans. b. economize in the use of their resources. c. allocate their resources equitably. d. exploit their resources.