Author Question: Those who accept both the rational expectations hypothesis and the assumption of flexibility of ... (Read 68 times)

crobinson2013 · **on:** Jun 30, 2018

Those who accept both the rational expectations hypothesis and the assumption of flexibility of wages and price would likely argue that

A) if policy makers are willing to accept a high inflation rate, they can reduce unemployment to a point below the natural rate.
B) policy makers can eliminate fluctuations in the level of business activity with careful planning of a widely publicized monetary policy.
C) saving and investment do not contribute to economic growth.
D) active policy making does not contribute to economic stability.

Question 2

Consider two countries: A and B. In country A there are well-defined private property rights and in country B there are no private property rights.

If the institutions hypothesis holds:
a) Which of the two countries is likely to grow faster?
b) Is the slower growing economy permanently disadvantaged?

brittanywood · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

D

Answer to Question 2

The institution hypothesis claims that differences in institutions are at the root of the differences in prosperity across the world.
a) Private property rights is an example of an institution. When citizens of a country enjoy private property rights they are assured that nobody can take their assets from them arbitrarily. Hence, private property rights act as incentives to increase productivity and this in turn increases the quantity of assets owned. In the absence of private property rights, the incentive to work is lower because there is no guarantee that assets or wealth will be retained by the owner. Hence, productivity is affected. Since country A has property rights, it is likely to grow faster than country B, and so is likely to be more prosperous.
b) No, the slower growing economy is not permanently disadvantaged. This is because institutions in an economy are developed by society and are not permanent. Institutions can be changed from time to time. Hence, if country B implements private property rights, it is likely to shed its