How do uncertainty and expectations influence economic behavior?
What will be an ideal response?
Business and consumers must make predictions of future economic conditions based on expectations. For example, firms spend considerable amounts of time and other resources to try to estimate future business conditions to make sure that they only invest in expected profitable projects. On the other hand, consumers also try to estimate the future condition of the economy and tend to adjust consumption expenditures based on their expectations. When expectations significantly differ from reality, or the unexpected happens, then the participants in an economy experience economic shocks that can be positive or negative in nature.
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In monopolistic competition, a firm must determine what price to set for its good because
A) the demand for its good is not perfectly elastic. B) the demand for its good is perfectly elastic. C) there are many buyers. D) there are many sellers.
Using aggregate demand and aggregate supply, explain what happens in the short run if the Federal Reserve raises interest rates in the economy. Be sure to detail what happens to aggregate demand, the price level, the level of GDP, and unemployment
Assume that the economy is at full employment before the interest rate increase.