With Rational Expectations, a Policy That Would Increase AD Would

question 104

Multiple Choice

With rational expectations, a policy that would increase AD would lead to:

• A)​higher inflation and higher real output in the short run.
• B)​higher inflation and lower real output in the short run.
• C)​higher inflation and an indeterminate effect on real output in the short run, if people's expectations were correct.
• D)​higher inflation and no change in real output, if people's expectations were correct in the short-run.

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Definitions:

Present Value Amount

The current value of a future sum of money or stream of cash flows, given a specified rate of return.

Rate of Earnings

Measures the speed at which a company or an investment generates income relative to a certain amount of assets, capital, or equity.

Compound Interest

The process of calculating interest on both the primary amount of a loan or deposit and on the interest that has previously been accrued over time.

Net Present Value

A financial metric that calculates the present value of all future cash flows (both inflows and outflows) of an investment, discounted back at a specific rate.