Author Question: If rational expectations hold, aggregate demand policy actions only affect output if a. they are ... (Read 79 times)

appyboo · **on:** Jun 30, 2018

If rational expectations hold, aggregate demand policy actions only affect output if

a. they are predictable.
b. they are unpredictable.
c. they are systematic.
d. they are permanent.
e. both b and d.

Question 2

Unprecedented stimulative policies throughout the global economy have sparked debate over the inflationary implications. Defenders of the policies argue that, even if the policies raise inflationary expectations, actual inflation will remain low.

Critics charge that current policies are nearly certain to result in excessive inflation. What does the aggregate supply curve have to say?

C.mcnichol98 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

B

Answer to Question 2

As long as the negative output gap persists, rising expectations of inflation will not translate into much actual inflation. However, if the output gap shrinks in absolute value as policy makers intend, nothing will insulate inflation from expectations. To avoid the critics' prediction of excessive inflation, policy makers must somehow manage expectations (and avoid allowing a positive output gap from emerging).