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The policy irrelevance proposition states that:

A. if expectations are not​ rational, monetary policy cannot have an impact on the economy.
B. only anticipated monetary policy changes can affect real GDP or the unemployment rate.
C. if expectations are​ rational, monetary policy cannot have an impact on the economy.
D. only unanticipated monetary policy changes can affect real GDP or the unemployment rate.

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Divya Singh
Divya SinghLv10
13 Oct 2020

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Related questions

Assuming people have rational expectations:
 
A) Monetary policy changes will cause the money supply to change, thereby causing changes in inflation and unemployment along a vertical Phillips Curve

B) When the Fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect the real GDP

C) When the government uses fiscal policy, then changes in the money supply will create quick adjustments in wages and prices which will not cause changes in real GDP

D) When the Fed uses monetary policy, people do not quickly adjust wages and prices, therefore, inflation will deviate from expectations and create fluctuations in real GDP

Problem Set 5

Complete all questions listed below. Clearly label your answers.

1. What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.

2. How rapidly has the money supply (M1) grown during the past twelve months? State the rate of growth (use http://www.federalreserve.gov/releases/h6/) and the most recent release, use the seasonally adjusted figures. Calculate the rate of growth across the year by taking the (new amount of M1- old amount of M1)/old amount of M1). Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why.

3. Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses.

4. Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short run? Are the long-run implications different? Explain.

True/False/Uncertain

A) Changes in expected future one-year real interest rates have a much larger effect on spending than changes in the current one-year real interest rate

B) The introduction of expectation implies that the IS curve is still downward sloping but is now much flatter

C) Current real money demand is inversely related to the future nominal interest rate

D )The rational expectations assumption implies that consumers consider the effects of future fiscal policy on output

E) Future monetary policy affects future economic activity but not current economic activity

F) Depending on its effect on expectations, a fiscal contraction may actually lead to an economic expansion

G) The very different effects of Ireland's deficit-reduction programs in 1982 and in 1987 provide strong evidence against the hypothesis that deficit reduction can lead to an expansion of output in the short run

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