Assume That the Rational-Expectations Theory Is a Realistic Assumption of How

question 71

Essay

Assume that the rational-expectations theory is a realistic assumption of how people and firms set their expectations. Indicate the effect of each of the following on the price level and aggregate output.
(a) The Fed announces that it will increase the supply of money.
(b) The government unexpectedly increases government spending.

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Definitions:

Indirect Format

A communication method that does not state the main point directly at the beginning, often used to soften the message or build context.

Responsibility

The obligation to carry out duties or tasks assigned to one's role or position, often with an ethical component.

Internal Announcement

A communication distributed within an organization, typically concerning policy changes, staff updates, or other internal matters.

Buffer

A neutral or soft opening statement in communication intended to reduce potential negative reaction to the message that follows.