What are rational expectations, and how might rational expectations make monetary policy ineffective?
What will be an ideal response?
Rational expectations is the assumption that people make forecasts of future values of a variable using all available information, so expectations equal optimal forecasts, using all available information. With rational expectations, if the central bank is credible and policy changes are announced, the moment a policy is announced, such as an increase in the target rate of inflation to attempt to temporarily boost the economy, expectations of inflation increase immediately, so real GDP never exceeds potential GDP and the economy never experiences the temporary expansion. Therefore, there is no trade-off between unemployment and inflation when expectations are rational and policy changes are anticipated. This will make monetary policy ineffective.
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If both nominal and real GDP are increasing when the money supply is constant, than we can conclude that
A) velocity has increased. B) interest rate has fallen. C) velocity has decreased. D) interest rate has increased.
Sarah and Diane are both billing clerks for the local trucking company earning $17,000 per year. Sarah is attending college, plans to graduate in one year and earn $55,000 as an economist
Diane is not in college or undergoing any specialized training and will have the same job next year. According to economic theory, which of the two individuals would tend to have a higher current savings rate? A) Diane B) Sarah C) Both will have the same saving rate. D) Economic theory sheds no light on this question.