Question

In: Economics

PLEASE SHOW THE EXPLANATION!! 1. Which of the following is consistent with advocates of rational expectations?...

PLEASE SHOW THE EXPLANATION!!

1. Which of the following is consistent with advocates of rational expectations? If consumers fully anticipate an increase in interest rates, then

Real GDP will increase by the value of the multiplier

Real GDP will decrease by the value of the multiplier

Real GDP will not change

Price level will increase

Unemployment will increase

2. Fiscal policy is limited when the slope of the

AS curve is more vertical so the multiplier is more effective

As curve is more vertical hence the multiplier is less effective

As curve is more horizontal so the multiplier is more effective

AD and AS curves are more horizontal so the multiplier is more effective

AD curve is more vertical so the multiplier is more effective

3. If productivity rises in the United States, we expect that

The short-run Philips curve will shift left

The short-run Philips curve will shift right

The long-run Philips curve will shift right

There will be a movement to the right along the short-run Philips curve

There will be a movement to the left along the short-run Philips curve

4. If congress engages in contractionary fiscal policy, we can expect that

The short-run Philips curve will shift left

The short-run Phillips curve will shift right

The long-run Philips curve will shift right

There will be a movement to the right along the short-run Philips curve

There will be a movement to the left along the short-run Philips curve

Expert Solution

1. Rational expectation means individual agent make their decisions based on the past trends. If consumers fully anticipate an increase in interest rate, they will save more as they will get a higher return on savings. Also, the higher interest rate will make higher borrowing cost which will decrease investment and it will lead to lower economic growth and lower inflation. As this decrease in growth is not the result of fiscal or monetary policy so there are no multiplier effects. Unemployment will increase due to lower economic growth and lower inflation. Therefore the option Unemployment will increase is correct.

2. Fiscal policy is limited when there is minimum or no effect of fiscal policy. When AS curve is more vertical then change in fiscal policy has minimum effect on real GDP. Therefore the second option is correct.

3. If productivity is increased in the US, that is real GDP will increase and unemployment is decreased. therefore there will be a movement to the left along the short-run Phillips curve will result in the decrease in unemployment. Therefore the last option is correct.

4. The contractionary fiscal policy will lead to decrease in real GDP and increase in unemployment. It will be the result of the movement to the right along the short-run Phillips curve. Therefore the fourth option is correct.

Rahul Sunny answered 2 years ago

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