Question

When the mayor of Blagoevgrad faces re-election, the city workers go out and repaint the crosswalks, fill in the potholes on the streets, mow the grass and trim the hedges in the city parks in the week before the election. If we believe that the upcoming election causes the mayor to order the city cleaned up, and not that the tidy city causes there the be an election -- then we are using the? :

Group of answer choices

rational expectations theory.

Kenesian theory.

real business cycle theory.

reverse causation theory.

menu cost theory.

Answer 1

Answer: Rational Expectations Theory
The term coined by John F MUth is used to describe the many economic situations in which the outcome depends partly on what people expect to happen. The rational expectations theory is a concept that is used widely in macroeconomics. The theory suggest that individuals base their decisions on three primary factors: their human rationality, the information available to them, and their past experiences.

KEYNESIAN THEORY
Keynesian theory is an economic theory of total spending in the economy and its effects on output and inflation.
Keynesian economics is a theory that says the government should increase demand to boost growth. Keynesian believe consumer demand is the primary driving force in an economy .Economic slumps can be avoided by influencing aggregate demand.

REAL business cycle
The real business cycle theory makes the fundamental assumption that an economy witnesses all these phases of business cycle due to technology shocks .There is a fluctuation in the ability of an economy to convert input into output due to technological influences.IF the technology improves the production increases from the same level of input.

Reverse Causation Theory
Two things are related to each other but not in a usual way.INstead of X having an influence on Y, Y has an impact on X.  Reverse causation (also called reverse causality) refers either to a direction of cause-and-effect contrary to a common presumption or to a two-way causal relationship in, as it were, a loop.

MENU COST THEORY
Menu cost is the expenditure incurred by a firm to alter its prices like expense of restraunts in printing menus with new prices.The firms are hesitant to change their prices until there is a sufficient disparity between the firm's current price and the equilibrium market price. Therefore, a firm should not change its price until the price change will result in enough additional revenues to cover the menu costs.




In the above mention situation we a re using a combination of two theories
1 The reverse causation theory
2. Rational expectations theory.

Re-election causes the mayor to order the city to be cleaned up , and not the other way around .Reverse causality means that X and Y are associated, but not in the way you would expect. Instead of X causing a change in Y, it is really the other way around.There is no loop . Election is not caused due to the cleaning of the cities.

Secondly,The rational expectation theory posis that individuals base their decisions on three primary factors: their human rationality, the information available to them, and their past experiences.In the above situation we are expecting the cleaning of city to be order due to past expectations. As the mayor has given such an order prior to previous election , we anticipate that he will do the similar thing again.THis theory is often used by economists to explain anticipated inflation rates.