Assume That in Economyland,people Make Forecasts Based on Adaptive Expectations

question 71

Essay

Assume that in Economyland,people make forecasts based on adaptive expectations.The central bank announces that it will fight a slight recession by increasing the money supply.What would be the effect of the announcement on inflation in the short run? The long run? How would your answers differ if people used rational expectations? Which situation do you think is more realistic,and why?

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Definitions:

Equilibrium Price

The price at which the quantity of a good or service demanded by consumers equals the quantity supplied by producers, resulting in market balance.

Moral Hazard

A situation in which one party engages in risky behavior or lacks incentive to guard against risk because they are protected by an insurance or other agreement.

AFLAC

An American insurance company that provides supplemental insurance to help cover expenses health insurance doesn't.

Triple Jump

An athletic event where the competitor makes a hop, a step, and then a jump in sequence.