Answered: 1. Are the implications of the rational…

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter17: The Trade-off Between Inflation And Unemploy

Section: Chapter Questions

Problem 6DQ

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1. Are the implications of the rational and adaptive expectations hypotheses different in the short-run?

A.No, because under both theories people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy.

B.Yes, because under adaptive expectations there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the rational expectations implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy.

C.Yes, because under rational expectations theory there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the adaptive expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy.

D. No, because under both theories, there is a significant time lag before people come to expect the inflation and incorporate it into their decision making.

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