If You Accept the Rational Expectations Hypothesis as Accurate, What

question 97

Multiple Choice

If you accept the rational expectations hypothesis as accurate, what would you tell monetary policy makers who ask you how to more effectively manage the economy?

• A) Consumers do not understand the workings of monetary policy, so discretionary and nondiscretionary policies are equally effective.
• B) Individuals do understand how monetary policy works, so consistency and predictability are the keys to effective policy making.
• C) Individuals base their economic expectations solely on current information, so repeating policy decisions that have worked in the past is the most effective path to take.
• D) Only unanticipated policies will be effective once individuals understand how monetary policy works.

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Definitions:

Accounts Receivable

The balance of money owed to a company by its customers for goods or services delivered or used but not yet paid for.

Credit

An entry recording an increase in assets or decrease in liabilities and equity on the company’s balance sheet, or the provision of goods or services in exchange for a promise of payment in the future.

Equity

The value of an ownership interest in property, including shareholders' equity in a company, represented by the assets minus liabilities.

Revenues

The total amount of money generated by the sale of goods, services, or other income for a company before any expenses are deducted.