Which of the Following Is an Important Implication of the Rational

question 31

Multiple Choice

Which of the following is an important implication of the rational expectations argument?

• A) Since people form their expectations using all available information, the use of monetary policies to eliminate output gaps will lead to inflation.
• B) Since any consistent set of monetary policies will be learned and anticipated by a population with rational expectations, policies designed to influence the economy to a level of production other than the potential real GDP will be ineffective.
• C) Although people may revise their expectations about the price level and future economic activity, they cannot act on these changes because in reality, wages and prices are sticky. Thus, policy intervention is necessary.
• D) Policymakers must constantly monitor economic activity and revise their economic policy goals to keep up with changing expectations of a population with rational expectations.

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Definitions:

Cash Flow Stream

A cash flow stream is a series of cash flows associated with an investment over a period of time.

Interest Rate

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.

Future Value

The value of an asset at a specific date in the future, calculated from its present value using the expected rate of return.

Compounded Semiannually

Interest calculation method where interest is added to the principal amount twice a year, leading to interest on interest in the second half.