If the Public Has Rational Expectations, an Attempt to Increase

question 21

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 than if the public alters their expectations slowly in response to changes in government policy.
• C)be ineffective if the shift in aggregate demand is predictable.
• D)be all of the above.

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Definitions:

Fixed Cost

Expenses that do not change with the level of production or sales, such as rent, salaries, and loans.

Conversion Cost

The expenses directly related to the transformation of raw materials into finished goods, including labor and manufacturing overhead costs.

Manufacturing Overhead

Indirect costs associated with manufacturing, such as maintenance, utilities, and quality control, not directly traceable to a specific product.

Direct Labor

Labor costs directly tied to the production of goods or services, which include wages for workers who physically produce a product.