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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Advocates of the theory of rational expectations believe that

a. the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation.

b. if disinflation catches people by surprise, it will have minimal impact on unemployment.

c. wage and price setters never expect the central bank to follow through on its announcements.

d. expected inflation depends on the rates of inflation that people have recently observed.

To determine

The exchange rate between Paris and New York.

Explanation

Sub part (a):

The rational expectation advocates believe that when there is a lower inflation rate, then the sacrifice ration would become smaller. Thus, option “a” is correct.

Sub part (b):

When there is a disinflation, then it would expect to increase the unemployment. Thus, option “b” is incorrect...

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