The Contribution of Rational Expectations Theory to the Long-Run Model

question 170

Multiple Choice

The contribution of rational expectations theory to the long-run model is the understanding that:

• A) economists must support the use of tax policy for long-run growth.
• B) the response of the public to policy changes makes the economy return to long-run equilibrium more quickly.
• C) the long-run model can rarely be applied.
• D) the economy remains in short-run equilibrium longer.

---

Definitions:

Income Effect

The change in consumer's purchasing behavior due to a change in their income, affecting how much of a product they buy.

Tax Revenues

The income that is gained by governments through taxation, used to fund public services, infrastructure, and government obligations.

Government Expenditures

The total amount of money spent by the government in a certain period, including spending on public services, social security benefits, and infrastructure projects.

Monetary Policy

The actions of a central bank or other regulatory authority that determine the size and growth rate of the money supply, which in turn affects interest rates.