New Classical Theory Asserts That, Because People Have Rational Expectations

question 14

Multiple Choice

New classical theory asserts that, because people have rational expectations, if a policy of reducing the money supply is used

• A) it might affect both aggregate demand and potential real GDP.
• B) consumers and firms observe that the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly.
• C) market participants react in such a way that shifts in aggregate supply will reinforce shifts in aggregate demand and real GDP will shift inevitably into inflationary or recessionary gaps.
• D) All of the above are true.

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Definitions:

Dietary Fiber

Indigestible components of plant foods that aid in digestion, help regulate blood sugar, and reduce cholesterol levels.

High Fiber

A diet rich in foods containing a lot of fiber, which is beneficial for digestive health and can help prevent constipation, diabetes, and heart disease.

Irritable Bowel Syndrome

A chronic gastrointestinal disorder that affects the large intestine, causing symptoms such as abdominal pain, bloating, and altered bowel habits.

Stress Level

A measurement of the amount of stress an individual is experiencing, which can affect physical and mental health.