D) If the Fed sets the money supply at the same time as people are setting prices, so that everyone has the same information about the state of the economy, then monetary policy cannot be used systematically to stabilize output. Hence, a policy of keeping the money supply constant will have the same real effects as a policy of adjusting the money supply in response to the state of the economy. (This is called the policy irrelevance proposition.)

D) If the Fed sets the money supply at the same time as people are setting prices, so that everyone has the same information about the state of the economy, then monetary policy cannot be used systematically to stabilize output. Hence, a policy of keeping the money supply constant will have the same real effects as a policy of adjusting the money supply in response to the state of the economy. (This is called the policy irrelevance proposition.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: Would it make sense to argue that rational expectations economics is an extreme version of…

A: As per the definition, the neo classical theory is based on the assumption that people have rational…

Q: Review the neoclassical model's basic microeconomic presumptions regarding customer behavior.

A: Neoclassical model: This term refers to a model in which supply and demand is used to account for…

Q: Suppose that the graph below represents the aggregate demand (AD) and aggregate supply (AS) of…

A: The Inflationary Gap represents the difference between the actual GDP of the country and the…

Q: Explain the term “Rational Expectations” as Thaler used in the first chapter of Misbehaving.

A: "Rational expectations" are model-consistent expectations in economics, in which agents within the…

Q: Would it be plausible to claim that the theory of rational expectations is a distorted form of…

A: According to the hypothesis, people's current expectations for the economy have the power to…

Q: Aggregate Demand is the prime mover of the economy." This statement was made by a: A. Classcal…

A: Aggregate demand is the sum of Consumption, Investment, government spending and net export. So, AD…

Q: If most people have rational expectations, how long will recession last ? Explain.

A: The recession is an economic phenomena and phase where the price tends to decline and all the…

Q: In neoclassical economics, if there is unemployment, it means that:

A: Neoclassical believes in wage flexibility

Q: Explain what is meant by ‘macroeconomics’ and why some economists think that it is different to…

A: Economics is the social science that learns how individuals and organizations allocate resources to…

Q: Given the following scenario, decide if Aggregate Demand (AD) or Short Run Aggregate Supply (AS)…

A: The aggregate demand is the sum of consumption , Investment , government spending and net export.…

Q: You read the financial news in The Wall Street Journal every day and subscribe to various government…

A: The question asks you to identify the type of expectations a person has based on their behavior of…

Q: Explain what would happen in the following markets given the following demand or supply shocks. In…

A: In a market for a commodity, any deviation from the equilibrium state creates an instability in the…

Q: why do expectations play such an important role in investment demand

A: Macroeconomics analyzes the economy as a whole. It studies aggregate economic concepts such as…

Q: Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but…

A: The term neoclassical represented the consumers first concern is to maximize personal satisfaction.…

Q: Economist who generally empgasize the importance of aggregate supply in determining the size of the…

A: Aggregate Supply refers to the total quantity of output that all the firms in the economy will…

Q: What is potential GDP and its significance for neoclassical analysis? It’s crucial to use examples…

A: GDP refers to the sum total of market value of final goods and services produced in a country during…

Q: Explain the dynamic effect by taking "Oil Prices and Inflation" as an example?

A: Fluctuations in oil prices impact inflation in a number of ways. A 10% increase in oil price will…

Q: Using the “dynamic aggregate demand” and “dynamic aggregate supply” (DAD/DAS) model: (a) draw a…

A: The dynamic aggregate demand and supply (DAD/DAS) model is a macroeconomic model that shows how…

Q: Suppose an economy is experiencing recession. From the list below, select two (2) policy tools that…

A: Recession is an general decline in the economic activities. It occurs when there is a decline in…

Q: A/ in capital, they will not be able to sell everything produced and profits will be expectations.

A: The cycle of production in economics refers to the process by which products and services are…

Q: In 2013, Prussia's aggregate demand curve was determined by the equation M + 1-4% A change in…

A: The quantity theory of money:The quantity theory of money equation can be written as follows:

Q: The long run in macroeconomics is the period of time in which prices do not change or do not change…

A: The end of the day may be a period of your time during which all factors of production and costs are…

Question

If the economy has rational expectations and the model is sticky price model. Could you explain why the following statement true in macroeconomics?

b) If the Fed sets the money supply at the same time as people are setting
prices, so that everyone has the same information about the state of the
economy, then monetary policy cannot be used systematically to stabilize
output. Hence, a policy of keeping the money supply constant will have the
same real effects as a policy of adjusting the money supply in response to
the state of the economy. (This is called the policy irrelevance proposition.)

Video Video

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

The long run in macroeconomics is the period of time in which prices do not change or do not change very much. True False Cliok to select your answer.
How can expectations about the future change what consumer buy now?
One practical limitation of the Classical or Neoclassical model is that it suggests allowing the economy to self-correct in the long run, but recessions may last a very long time. How severe is this problem and why? What is one example?
What is the Neoclassical Economics view of labor markets. How do they function? Does the economy produce full employment? How? If not, why?
Summarize the Neoclassical model: A. The neoclassical model is built on the importance of aggregate demand as a cause of business cycles and a degree of wage and price rigidity, and thus does a sound job of explaining many recessions and why cyclical unemployment rises and falls. B. The neoclassical model emphasizes aggregate supply by focusing on the underlying determinants of output and employment in markets, and thus tends to put more emphasis on economic growth and how labor markets work. C. The neoclassical model is built on the importance of aggregate supply as a cause of business cycles and a degree of wage and price rigidity, but does a poor job of explaining many recessions and why cyclical unemployment rises and falls.
Consider the following dialogue about the crash of the housing market and the Great Recession of 2007–2009 between two students in a economics class. Fill in the blank ALEX: Hi, Becky. I’m intrigued to see how macroeconomics allows us to explain recent economic events such as the Great Recession that affected so many people. But there’s one thing I don’t understand. Was the collapse of the housing bubble the only cause of the recession, or were there other factors as well? BECKY: Hi, Alex. I agree that macroeconomic theory offers an entirely new perspective on how the economy works. To answer your question, the crash of the housing market was a major factor but not the only cause of the Great Recession. The professor mentioned that the __________ (options: financial, fiscal, government) system deteriorated as well, an event that deepened the economic downturn even further. ALEX: I see. So the bursting of the housing bubble caused the initial decline in aggregate demand. Then the…
Why would neoclassical economists think that the government doesn't need to take many steps to combat unemployment? Whether you concur or disagree Explain.
Evaluate the relationship between the short-run and long-run cost curves of a profit-maximising firm in neoclassical microeconomic theory focusing on their assumptions.”
What happened to the demand for rental cars during the first half of 2021? I.e., was there a positive or negative demand shock? What caused the shock?
Please expain in detail what is the Neoclassical Economics view of labor markets. How do they function?
Hi, thank you for the very fast response, right now I'm studying about Krugman’s speculative attack model.Please help with the question (d): In Krugman’s speculative attack model, how can the model be modified so a jump does take place when the speculative attack occurs?
QUESTION 2 Which one of the following is the best example of someone acting according to the assumptions of the traditional neoclassical model? O A firm decides to make T-shirts out of organic cotton because of its commitment to environmental protection. O Chip buys an exercise machine based on a TV ad, even though research has shown that the machine is ineffective. Alenia buys groceries for her sick neighbor out of kindness. Dori studies hard for her test so she can eventually land a great job. Marc buys a pack of cigarettes out of habit.