If the Public Has Rational Expectations, an Attempt to Increase

question 105

Multiple Choice

If the public has rational expectations, an attempt to increase aggregate demand to stimulate the economy will:

• A)​be less inflationary in the short run than if the public alters their expectations slowly in response to changes in government policy.
• B)​be more effective if the public alters their expectations quickly in response to changes in government policy.
• C)​be ineffective if the shift in aggregate demand is predictable.
• D)​all of the above.

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Definitions:

Income Elasticity

Income elasticity of demand measures how much the quantity demanded of a good changes as consumer income changes.

Low-quality Beef

This refers to beef that does not meet certain standards of texture, flavor, or nutritional value.

Cross-price Elasticity

Cross-price elasticity measures how the quantity demanded of one good responds to a change in price of another good, indicating the degree of substitutability or complementarity between them.

Elasticity of Supply

The measure of how much the quantity supplied of a good changes in response to a change in price.