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Money, Banking, and Financial Markets Practice Test: Rational Expectations
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Rational expectations is an economic theory that attempts to infer the macroeconomic consequences of people's decisions based on all available knowledge. It's a modeling technique used in economics to describe economic situations where the outcome depends on what people expect to happen.  The theory assumes that there is a commonly accepted economic theoretical model that captures the evolution of the economy. At an equilibrium, people should form their expectations consistently with that model.  The theory of rational expectations was first proposed by John F. Muth of Indiana University in... Show more
Money, Banking, and Financial Markets Practice Test: Rational Expectations
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25 Questions

1. The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as
2. The rational expectations hypothesis implies that when macroeconomic policy changes,
3. The interest rate thought to have the most important impact on aggregate demand is the
4. Wage and price rigidities created by long-term contracts suggest that an anticipated monetary expansion will have
5. Rigidities that diminish wage and price flexibility such as long-term contracts suggest that an increase in the expected price level
6. An important feature of the new classical model is that an expansionary policy, such as an increase in the rate of money growth, can lead to a decline in aggregate output if the
7. In the view of the new classical economists, an increase in the money supply will affect aggregate output and employment only if the increase in money supply is
8. An anticipated increase in the money supply causes the largest long-run increase in real output in
9. In the new Keynesian model, an unanticipated increase in the money supply causes
10. In the new classical macroeconomic model developed by Lucas and Sargent, expansionary macropolicies affect aggregate output
11. In the new classical model, an anticipated policy of a continually increasing money supply causes
12. Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies, most economists agree that
13. Kristin the economist argues that an anticipated monetary expansion will cause aggregate output to increase but believes that aggregate output would increase by an even greater amount if the monetary expansion came as a surprise to everyone. Kristin is probably a
14. The new classical macroeconomic model assumes that expectations are ________ formed and that wages and prices are ________ with respect to the expected price level.
15. In the new classical macroeconomic model developed by Lucas and Sargent, an anticipated monetary expansion will
16. The model that assumes that expectations are formed rationally but does not assume complete wage and price flexibility is known as the
17. By ________ its deficit, the governmentʹs credibility of anti-inflationary policy ________.
18. An expansionary monetary policy will cause aggregate output to expand in the new classical macroeconomic model
19. Mariann the economist argues that expectations are formed rationally, yet a pre-announced monetary expansion will lower unemployment. Mariann is probably a
20. In the new Keynesian model
21. Lucas argues that when policies change, expectations will change thereby
22. The Lucas critique is an attack on the usefulness of
23. An anticipated increase in the money supply causes the largest short-run increase in the price level in
24. In the new classical model, an unanticipated increase in the money supply causes
25. The policy ineffectiveness proposition

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