The Problem with the Traditional Macroeconomic Treatment of Expectations of Inflation

question 246

Multiple Choice

The problem with the traditional macroeconomic treatment of expectations of inflation is that

• A) the model is not consistent with the microeconomic assumption that individuals are rational, forward-looking people.
• B) the model assumes that individuals will merely guess at what the inflation rate will be.
• C) in the model people always assume that inflation will be zero.
• D) the way people formulate expectations in that model assumes that individuals are highly sophisticated in their economic thinking.

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Definitions:

Credit Card

A Credit Card is a payment card issued by financial institutions that allows cardholders to borrow funds within a pre-approved limit for purchases or cash advances.

Price Stability

A situation in which prices in the economy do not change significantly over time, avoiding inflation and deflation.

Largest Banks

Refers to the major banking institutions that have the most significant market share, assets, and customer base in the financial industry.

World

The planet Earth and all its inhabitants, countries, ecosystems, and human-made environments, considered as a whole.