With Rational Expectations, a Policy That Would Decrease AD Would

question 84

Multiple Choice

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

• A)​lower inflation and lower unemployment in the short run if people underestimated the effect of the policy on inflation.
• B)​lower inflation and higher unemployment in the short run if people underestimated the effect of the policy on inflation.
• C)​lower inflation and an indeterminate effect on unemployment in the short run, if people's expectations were correct.
• D)​both (b) and (c).

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Definitions:

Weber's Law

A principle in psychology that states the smallest noticeable difference in stimulus intensity is proportional to the intensity of the original stimulus, making it a relative measure rather than an absolute one.

Discernible

Easily recognized or distinguishable; capable of being seen or understood through observation or clear evidence.

Weber's Law

A principle stating that the change in a stimulus that will be just noticeable is a constant ratio of the original stimulus.

Menswear Store

A retail establishment that specializes in selling clothing and accessories specifically designed for men.