Consider the two graphs above. Suppose that businesses expect to hire more workers. This would ________ the desired level of the capital stock, as depicted in graph ________

Inflation: a. always reduces real income

b. never reduces real income. c. reduces the real income of workers when wages increase more than prices do. d. reduces the real income of workers when wages increase less than prices do. e. increases the real income of workers only when wages increase less than prices do.

Answer the following statements true (T) or false (F)

1. Rational expectations theory suggests that people make consistent forecasting errors regarding the effects of policy. 2. Mainstream economists contend that monetary policy tends to be destabilizing, in contrast to monetarists who believe that monetary policy is a stabilizing factor. 3. An efficiency wage is an above-market wage that spurs greater work effort and gives the firm more profits because of lower wage costs per unit of output. 4. The "efficiency wage" is one possible explanation for rigidities in the economy that leads to economic instability. 5. Monetarists recommend that the supply of money should be increased at a constant rate each year, proportionate with the long-run growth of real output.