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:

Fixed Manufacturing Overhead

Costs that remain constant in total regardless of the level of production, such as salaries and rent for factory buildings.

Predetermined Overhead Rate

A rate used to apply manufacturing overhead to products or services, calculated before the accounting period begins based on estimated costs.

Fixed Manufacturing Overhead

Costs that do not vary with the level of production or sales, including expenses like rent, salaries, and utilities.

Absorption Costing

An accounting approach that includes all manufacturing costs (both variable and fixed) in the cost of a product, used for external reporting.