Author Question: If workers and firms have rational expectations, they form their expectations using A) only ... (Read 123 times)

sc00by25 · **on:** Jun 29, 2018

If workers and firms have rational expectations, they form their expectations using

A) only information provided to them by the government.
B) only information from the past.
C) only information gathered from random sources.
D) all the information available to them.

Question 2

If expectations are adaptive, how will the economy adjust to a new long-run equilibrium in response to contractionary monetary policy? Support your answer with a graph of the Phillips curve.

What will be an ideal response?

snackralk · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

D

Answer to Question 2

Contractionary monetary policy reduces the inflation rate. With adaptive expectations, workers and firms will overestimate inflation, resulting in an increase in the real wage and an increase in the unemployment rate (move from A to B on the short-run Phillips curve below). Eventually, workers and firms will adjust to the fact that inflation is lower, shifting the short-run Phillips curve down and reducing the unemployment rate to its natural rate (move from B to C in the graph below).