Under rational expectations, in the long run actual output in this economy ()
Tap an option to check your answer.
1 mark, −0.333333333333333MacroeconomicsBusiness cycles and rational expectationsRational expectations and the Lucas critiqueModerateabout 3 min
DSE 2015 Question 19: Business cycles and rational expectations
Answer and worked solution
Checking your account…
Plain-text version
Under rational expectations, in the long run actual output in this economy (Yₜ=α Y^eₜ+γ(Y^eₜ)²) (A) will always go to zero (B) will always go to infinity (C) will always go to a finite positive value (1-α)/γ (D) will go to zero or infinity depending on agents' expectations
Also written as: Under rational expectations, in the long run actual output in this economy (Y_t=alpha Y^e_t+gamma(Y^e_t)^2)
Business cycles and rational expectations has come up 21 times in 5 exams since 2010.
What this question tests
This question is on Rational expectations and the Lucas critique, part of Business cycles and rational expectations in Macroeconomics.
How expectations formed with all available information change what policy can do.
TestStop has 9 past-paper questions on this subtopic; the nearest in year are below.
Similar questions from other papers
- Match List - I with List - II: List-I: A. Cobweb Theorem; B. Over Investment Theory; C. Multiplier-Accelerator Theory of Business Cycle; D. Psychological Theory…
- Consider the following statements: Statement 1: The new classical policy ineffectiveness proposition asserts that, systematic monetary policy and fiscal policy actions…
- Consider the following statements: A. Innovation Theory of Business cycle was given by Jorgenson B. Pure Monetary Theory of Business cycle was given by Hawtrey C.…
- Which of the following are true about the New Classical approach? A. The main protagonist was R. E. Lucas Jr. B. It is based on adaptive expectations. C. It was…
- According to the Real Business Cycle School, in the absence of supply shock:
Question from the DSE 2015 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.