According to Lucas' Rational Expectations Approach, What Will Happen If

question 32

Multiple Choice

According to Lucas' rational expectations approach, what will happen if the Fed announces and implements a 4% decrease in money supply?

• A)output will remain unchanged but the price level will decrease by 4% in the long run
• B)both output and the price level will decrease by more than 4% in the short run and by 4% in the long run
• C)output and the price level will both decrease in the short run, but only output will change by 4% in the long run
• D)output will decrease by 4% and the price level will initially remain the same but will decrease by 4% as people change their expectations
• E)output and the price level will both immediately decrease by 4%

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Definitions:

Increasing Basicity

Describes the trend or sequence in which the ability of a substance to act as a base increases.

Increasing

Becoming larger or greater in size, number, value, or amount.

pKa

A quantitative measure that reflects the acid strength of a substance; the lower the pKa value, the stronger the acid.

Methanol

A light, volatile, colorless liquid with a distinctive alcoholic odor, used as an antifreeze, solvent, fuel, and as a denaturant for ethanol.