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:

Capital Market

A financial market in which long-term debt and equity-backed securities are bought and sold, serving as a platform for raising long-term funds.

Present Value

The present value of a future amount of money or series of payments, calculated using a predetermined interest rate.

Market Value

The market price at which you can currently trade a service or asset.

Future Earnings

The projected income or profits that an individual, company, or asset is expected to generate in the future.