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Rational expectations theory

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1. Which of the following theories of expectations holds that individuals usa all information available in forming expectations?
Rational expectations theory
Certainty equivalent theory
Expected value analysis
Adaptive expectations theory

2. The only school of economics that could be construed as advocating big government are the :
classicals
keynesians
montearists
supply-sider

3. Proponents of the monetarist approach to economic stabilzation think that the growth of the money supply should be equal to the:
prime rate
long-term average growth of real output
real interest rate
growth of federal expenditures

4. A conclusion of the theory of rational expectations is that the impact of discretionary fiscal polices designed to shift the aggregate demand curve will:
result in no net change in aggregate demand
be anticipated and compensated for, causing no significant in real GDP or employment levels
be completely opposite of the intended result
be incorrectly evaluated by most economist

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Solution Preview

1. Which of the following theories of expectations holds that individuals use all information available in forming expectations?

Rational expectations theory

This is just saying that any errors that do happen in the decision making process are due to unexpected shocks, that is effectively saying that people use all available information.

2. The only school of ...

Solution Summary

Rational expectations theory is reiterated.

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Discussing rational expectations theory

How realistic do you think the rational expectations theory is? Can you provide examples?

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