Rational Expectations Theory Asserts That Because People Have Rational Expectations

question 163

Multiple Choice

Rational expectations theory asserts that because people have rational expectations, if a policy of reducing the money supply is used:

• A) it might affect both AD and potential real GDP.
• B) consumers and firms observe that the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly.
• C) participants in economic activity react in such a way that shifts in aggregate supply will reinforce shifts in aggregate demand, and real GDP will shift inevitably into inflationary or recessionary gaps.
• D) periods of unemployment will be very short.

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Definitions:

Monthly Basis

Refers to events, measurements, or calculations that occur or are determined every month.

Ledger Account

A record that summarizes all the transactions related to a particular item or individual in the accounting system, facilitating the preparation of financial statements.

Service Revenue

Revenue generated from the provision of services to customers.

Accounts Receivable

Accounts Receivable refers to the money owed to a company by its customers for products or services delivered or used but not yet paid for.