Macroeconomics (9th Global Edition)
9th Edition
ISBN: 9780134141534
Author: Andrew B. Abel, Ben Bernanke
Publisher: Pearson Global Edition
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Chapter 7, Problem 5RQ
To determine
To describe: The expectations theory and its sufficiency in explaining the normally observed interest rates.
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According to the pure expectations theory, the short term rates will exceed long term rates whenever market participants expect short term rates to increase in the future.
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According to the rational-expectations approach, if everyone believes that policymakers are committed to reducing inflation, the cost of reducing inflation—the sacrifice ratio—will be lower than if the public is skeptical about the policymakers’ intentions. Why might this be true? How might credibility be achieved?
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Macroeconomics (9th Global Edition)
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- According to the rational-expectations approach, if everyone believes that policymakers are committed to reducing inflation, the cost of reducing inflation—the sacrifice ratio—will be lower than if the public is skeptical about the policymakers’ intentions.Why might this be true? How might credibility be achieved?arrow_forwardExplain the implications of the rational expectations assumption for the Explain the implications of the rational expectations assumption for the effectiveness of economic stabilization policy? Explain the implications of the rational expectations assumption for thearrow_forwardAccording to rational expectations theory, forecast errors of expectations (a) are more likely to be negative than positive. (b) are more likely to be positive than negative. (c) tend to be persistently high or low. (d) are unpredictable.arrow_forward
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