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:

Degrees of Freedom

The number of independent values or quantities which can be assigned to a statistical distribution or calculation.

Area

The measure of the extent of a two-dimensional surface or shape, in square units.

Student T Distribution

A probability distribution used in statistics for estimating population parameters when the sample size is small and the population variance is unknown.

Normal Distribution

Exhibiting symmetry around the mean, this probability distribution reveals that there are more occurrences close to the mean than far away from it.