Explain why rational expectations theorists do not support government intervention to alleviate unemployment. Explain their views on the effectiveness of fiscal policy and monetary policy.
What will be an ideal response?
Rational expectations theorists believe that anticipation of fiscal or monetary policy undermines the policy. They believe that workers are smart enough to learn from experience how to overcome the effects of the government's policies. If the government tries to cut unemployment with fiscal policy, workers will expect inflation and will try to prevent inflation losses by instantaneously demanding higher wages. This undermines fiscal policy by eliminating any short-run price-cost gap, 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, and firms will demand higher prices resulting in a higher price level.
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A decrease in government spending on the park system would cause
A) the aggregate demand curve to shift to the right. B) the aggregate demand curve to shift to the left. C) a movement down and to the right along the aggregate demand curve. D) a movement up and to the left along the aggregate demand curve.
The portion of consumer surplus that would have existed in a perfectly competitive market but is unobtainable by anyone in society under a monopoly is known as
A) monopoly profits. B) an unattainable surplus. C) a deadweight loss. D) an external cost.
As shown in Exhibit 5-9, assuming goods X and Y are substitutes, an increase in the price of Y, other factors held constant, could move the equilibrium from point E to point:
a. A. b. B. c. C. d. D.
The more narrowly we define a good, the easier it is to find substitutes, and
a. the greater is the number of producers of that good b. the greater is the supply-side response c. fewer consumers therefore wish to purchase the good d. less elastic is the demand for that good e. more elastic is the demand for that good