Suppose That Monetary Policymakers Announced That They Were Going to Make

question 110

Multiple Choice

Suppose that monetary policymakers announced that they were going to make a serious effort to fight inflation. A few years later the inflation rate has been reduced, but there had also been a serious recession. Which of the following could we conclude with certainty?

• A)We could conclude that the rational expectations hypothesis is false.
• B)We could conclude that the rational expectations hypothesis is true.
• C)We could conclude that the policymakers lacked credibility.
• D)No conclusion about the rational expectations theory or the policymakers' credibility can be drawn with certainty.

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Definitions:

Investment Account

A financial account held by an investment dealer that enables individuals to purchase securities such as stocks, bonds, and mutual funds.

Annually

Happening annually.

EAR

The Effective Annual Rate, a measurement of interest that takes into account the effect of compounding over the period of time it is applied.

Compounded Monthly

The process of calculating interest on an initial principal, which also includes all of the accumulated interest from previous periods on a loan or investment, with the compounding occurring on a monthly basis.