If People Have Rational Expectations and Correctly Estimate the Effects

question 38

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 decrease 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.

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Definitions:

Reserves

Funds or materials set aside for future use or in case of an emergency, often referring to financial or resource stockpiles.

Flexible Exchange Rates

A system under which the value of a country's currency is allowed to fluctuate according to the foreign exchange market.

International Value

The worth or significance of goods, services, or assets on a global scale, often influenced by exchange rates and international trade.

Terms Of Trade

The rate at which units of one product can be exchanged for units of another product; the price of a good or service; the amount of one good or service that must be given up to obtain 1 unit of another good or service.