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“Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate.” This statement best illustrates a. Keynesian theory. b. rational expectations theory. c. incomes policy. d. supply-side theory.

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Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040

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BuyFindarrow_forward

Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040
Chapter 27, Problem 12SQ
Textbook Problem
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“Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate.” This statement best illustrates

  1. a. Keynesian theory.
  2. b. rational expectations theory.
  3. c. incomes policy.
  4. d. supply-side theory.

To determine

The hypothesis that argues for stable money supply growth.

Explanation of Solution

People make expectations about the future to make their expectations to meet their needs. These expectations play a very important role in the economy because the decisions regarding money are made on the basis of these expectations. There are many models of expectations, and some of them are the rational expectations hypothesis, adaptive expectation hypothesis, lagged expectation hypothesis, and so on.

Option (b):

The rational expectation hypothesis explains that people will not only make use of the recently available information to predict their future but also they would make use of all the available information in the economy and the past experiences of the economy to predict their future including the impact of the monetary and fiscal policies in the economy. Thus, people argue that the economy should have preannounced and stable policies along with the constant money supply growth to achieve the economic growth and lower inflation. The unexpected and unstable money supplies cause the problems in the economy. Therefore, option 'b' is correct.

Option (a):

The Keynesian economic theory argues for the participation of the government in the economy through the fiscal policies to regulate the economy...

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