Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 16, Problem 4QQ
To determine
Explain the time inconsistency of discretionary policy.
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Match the statement to whether it describes rational expectations or adaptive expectations:
A. Decisions are relatively slow to respond to new information about the economy
B. If people expect it to rain a lot next month, they will start buying umbrellas today to take advantage of the relatively lower prices
1. Rational expectations
2. Adaptive expectations
According to the theory of rational expectations, errors in predicting inflation will a. tend to be biased downward when inflation is rising, and tend to be biased upward when, inflation is falling. b. tend to be biased upward when inflation is rising, and tend to be biased downward when inflation is falling. c. be purely random. d. be biased upward more often than not.
Rational expectations believe that
a. the government must change government spending and taxes during inflation and deflation gaps
b. people will form the most accurate possible expectations about the future that they can, using all the available information available to them
c. the federal reserve must buy and sell government securities during inflation and deflation gaps
d. the economy will never self-correct
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Similar questions
- Why do negative supply shocks pose a dilemma for policymakers? A. Negative supply shocks do not respond to policy interventions. B. Monetary policy following negative supply shocks can lead an economy into a deflationary spiral. C. Policymakers must choose between stabilizing inflation and stabilizing economic activity. D. Policies that address negative supply shocks are less effective than those that address positive supply shocks.arrow_forwardWhich of the following expectations will NOT increase spending? a. Employment b. Laying off c. Maturity of Investment d. Promotionarrow_forwardConsumers expectations do not effect demand.Select one:a. Falseb. Truearrow_forward
- Under the Pure Expectations Theory, if these investors believe that interest rates will rise in the near future, a. Two statements are correct. b. they will make up for the lower short-term yield when the short-term securities mature, and they reinvest at a higher rate (if interest rates rise) at maturity. c. All statements are correct. d. the large supply of funds in the short-term market will force annualized yields down, while the reduced supply of long-term funds forces long-term yields up. e. they will invest their funds mostly in the short-term risk-free securities so that they can soon reinvest their funds in securities that offer higher yields after interest rates increase. f. their actions cause funds to flow into the short-term market and away from the long-term market. g. Three statements are correct.arrow_forwardWhich theory states that people make decisions based on information they've gathered? A. Life-cycle theory B. Theory of rational expectations C. Keynesian theory D. Theory of adaptive expectationsarrow_forwardSuppose wages and prices are flexible, people form their expectations rationally, and they anticipate policy incorrectly.What happens?arrow_forward
- Which of the following is false? a. If people can anticipate the plans of policymakers and alter their behavior quickly, their behavior could neutralize the intended impact of government action on real GDP. b. The theory of rational expectations leads to optimistic conclusions regarding macroeconomic policy’s ability to achieve its intended economic goals. c. Rational expectations economists believe that wages and prices are flexible, and that workers and consumers incorporate the likely consequences of government policy changes quickly into their expectations. d. Catching consumers and businesspeople off-guard with macroeconomic policy changes gets harder the more you try to do it. e. None of the above is false; all are true.arrow_forwardRational vs Adaptive Expectations. How are they both different from the assumption we have used up to this point? What are the policy implications of one versus the other?arrow_forwardHow can expectations about the future change what consumer buy now?arrow_forward
- You're a pricing analyst for a manufacturing firm. You are tasked with predicting how average prices will change over the next quarter to help your manager decide how to change her prices. How might you find the best estimate of the likely inflation rate? For the best estimate, obtain the average forecast of many economists. look to the financial markets. analyze surveys of people's inflation expectations. rely on the forecast of an eminent economist.arrow_forwardIn the New Keynesian Rational Expectations model with a Taylor rule, if the central bank follows the Taylor principle A. there are two steady states. B. there is one steady state. C. there are three steady states. D. there is no steady state. E. there are many steady states.arrow_forwardOld MathJax webview Assume the public have rational expectations. According to the model, which policy is better: A monetary authority bound by rules or discretion? Assume the public have rational expectations. According to the model, which policy is better: a monetary authority bound by rules or discretion? For my equilibrium rate of inflation my answer was 0. For my equilibrium rate of output I got 2.5.arrow_forward
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