3. What is a significant difference between rational and adaptive expectations? A. Rational expectations rely solely onhistorical data. B. Adaptive expectations adjust predictions based on new information. C. Rational expectationsincorporate all available information, including new data. D. Adaptive expectations are always more accurate thandrational expectations. 9) Which asset demand function is legit? a) 4" = 2R² + σ - 31 + 2w b) 4" = 2R - 20 +31 + 2w cd) A = 2R-σ +31-2w d) 4" = -2R +σ +3i + 2w

The objective of the first part of the question is to understand the key differences between…

Answered: 3. What is a significant difference…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Match the statement to whether it describes rational expectations or adaptive expectations: A. Decisions are relatively slow to respond to new information about the economy B. If people expect it to rain a lot next month, they will start buying umbrellas today to take advantage of the relatively lower prices 1. Rational expectations 2. Adaptive expectations
If the government uses contractionary monetary policy to reduce inflation from 9 to 6 percent. If people have adaptive expectations, than Inflation rate (%) 12 10 9 8 6 4 0 4 Long run Phillips curve Natural rate 5 E Short run Phillips curve 9 Unemployment rate (%) Unemployment will rise to 8 percent in the short run. The natural rate will permanently increase to 8 percent The economy will remain stuck at point E1. Unemployment will remain at 6 percent as the inflation rate falls.
9. Study Questions and Problems #9 Initially, the economy is operating at the natural unemployment rate of 4%, and the inflation rate is also 4%. People correctly anticipate that the Fed's hike in the discount rate will cause the inflation rate to fall to 2%. According to rational expectations, inflation , and the unemployment rate 4% in the short run. In the long run, the unemployment rate will be 4%.
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Consider the infinite horizon RBC model with uncertainty developed in class where the representative consumer and firm are assumed to have rational expectations. The consumer has following expected lifetime utility: Eo B¹ {log (C₂) +nlog(1)} ŋ>0, and ß € (0,1), t=0 wher C, is consumption and 1, is leisure. The consumer's lifetime budget constraint looks like: Ct › wt (h − lt) + IIt − It ==0(1+rs) t=0 II's=0(1+rs) Σ + So where h> 0 denotes total hours available for either work or leisure; w, is the wage rate; II, denotes the dividend/profit payments; T, denotes lump-sum taxes; r is the interest rate and So 20 denotes the initial savings. Show that the consumer's Euler equation-i.e., the optimal choice of consumption today versus consumption tomorrow-takes the following from: } = BE: {C+7(1+7+4+1)}. (Hint: take the F.O.C. w.r.t. C, and isolate E,{A}. Next, take the F.O.C. w.r.t. C++1 and isolate Et+1{A} then take the expectation of this expression at time t and note that E+E++1{A} = E{A}…
5. Consider the standard Phillips curve. Select all the correct statements: (a) A positive aggregate demand shock will lead to an upward shift in the Phillips curve. (b) Changes in short-run output will lead to movements along the Phillips curve. (c) A negative inflation shock will lead to movements along the Phillips curve. (d) A shock to the price of oil will lead to a shift in the Phillips curve. (e) The inflation rate will always be equal to zero when short-run output is equal to zero.
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