Assuming That the Rational Expectations Hypothesis Is NOT in Effect

question 22

Multiple Choice

Assuming that the rational expectations hypothesis is NOT in effect, in the short run an expansionary monetary policy should

• A)shift the aggregate supply function.
• B)increase real Gross Domestic Product (GDP)and the price level.
• C)increase the rate of unemployment.
• D)generate stagflation.

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Definitions:

Highest Value

The maximum value attained or attainable under specific conditions.

Compounded Semi-annually

Interest on an investment is calculated and added to the principal amount two times a year, leading to exponential growth.

Compounded Annually

The process where the interest earned on an investment is added to the principal sum at the end of each year, so that the interest in the next year is calculated on the principal plus previously accumulated interest.

Lump Sum

A large single payment made at a particular time, as opposed to multiple payments made over time.