If People Have Rational Expectations and Correctly Estimate the Effects

question 77

Multiple Choice

If people have rational expectations and correctly estimate the effects of a change in government policy, when the economy is initially at full employment, any anticipated increase in aggregate demand will result in:

• A)a decrease in both aggregate demand and short-run aggregate supply.
• B)an increase in short-run aggregate supply that will maintain full employment.
• C)higher prices that will reduce aggregate demand to its original level.
• D)a decrease in short-run aggregate supply that will maintain full employment.
• E)no shift in either aggregate demand or short-run aggregate supply.

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Definitions:

Drive Theory

A psychological concept suggesting that motivation arises from biological drives that propel an organism to satisfy its needs.

Physiological Equilibrium

The state of internal, physical, and chemical balance maintained by living systems.

Drive Reduction

A motivational theory that suggests behavior is motivated by the desire to reduce internal drives caused by unmet physiological needs, aiming to return to a state of homeostasis.

Incentive

A factor, often external, that motivates or encourages individuals to act or behave in a certain way.