According to the Theory of Rational Expectations, an Expected Increase

question 134

Multiple Choice

According to the theory of rational expectations, an expected increase in government spending would cause the aggregate supply curve

• A) to shift to the left at the same time that the aggregate demand curve shifts to the right.
• B) to shift to the left some time after the aggregate demand curve has shifted to the right.
• C) to shift to the right before the aggregate demand curve shifts to the right.
• D) not to shift at all.
• E) to shift to the right after the aggregate demand curve shifts.

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Definitions:

Laffer Curve

An economic theory proposing that there is an optimal tax rate that maximizes government revenue without discouraging productivity and investment.

Marginal Tax Rates

The rate of tax applied to the last dollar of income, which varies depending on income level and tax bracket.

Tax Revenue

The income that a government receives from taxation of individuals and businesses.

Rational Expectationists

Economists advocate the view that people base their choices on logical thinking, accessible data, and historical experiences.