Which of the following is false?
A)Rational expectations theory suggests that government economic policies designed to alter aggregate demand to meet macroeconomic goals are of very limited effectiveness, because when policy targets become public, people will alter their own behavior from what it would otherwise have been, and in so doing, they largely negate the intended impact of policy changes.
B)If changes in inflation surprise people, they will have little effect on unemployment or real output in the short run.
C)An unanticipated increase in AD as a result of an expansionary monetary policy stimulates real output and employment in the short run, but an anticipated increase in AD does not.
D)Unanticipated increases in AD expands output and employment in the short run, but only increases the price level in the long run.

Question

Which of the following is false?
A)​Rational expectations theory suggests that government economic policies designed to alter aggregate demand to meet macroeconomic goals are of very limited effectiveness, because when policy targets become public, people will alter their own behavior from what it would otherwise have been, and in so doing, they largely negate the intended impact of policy changes.
B)​If changes in inflation surprise people, they will have little effect on unemployment or real output in the short run.
C)​An unanticipated increase in AD as a result of an expansionary monetary policy stimulates real output and employment in the short run, but an anticipated increase in AD does not.
D)​Unanticipated increases in AD expands output and employment in the short run, but only increases the price level in the long run.

Quizplus · Accepted Answer

Changes in inflation affect people's perception of the real value of their nominal wages. When inflation is higher than expected, the real wages decline, leading to a decrease in the aggregate supply. This, in turn, results in higher prices and lower output. As a result, unexpected inflation can lead to lower employment and GDP in the short run.

Which of the Following Is False