Question

QUESTION 36 The rational expectations hypothesis suggests that enticipated fiscal and monetary policy actions are not likely to achieve their stated aims O anticipeted monetary policy actions are more powerful than fiscal policy actions O unanticipsted fiscal policy sctions are more powerful than monetary policy actions o fscal policy actions only work when accompanied by changes in the money supply QUESTION 37 LHAS RAS SRAS, AD In the above figure, starting at E1, if there is s supply shock that is permanent, the shift to SRAS2 and LRASo would shift to LRAS1 o aggregate supply would o aggregate supply would shift to SRAS1 and then return to SRASo G aggregate supply would shift to SRAS1 and LRASo would shift to LRAS1 aggregate supply would shift to SRAS1 snd LRAS1 would shift to LRAS

36 and 37 please

Answer 1

36. The rational expectations hypothesis was initially meant to deduce the expected rate of inflation or prices. Hence it suggests that the fiscal policies are a better tool to take due actions, which should be accompanied by changes in money suplly to keep other macroeconomics variables in check. Hence the last option is best suited.

37. The permanent supply side shock woukd hurt the sentiments of the suppliers both in the long run and in the short run. Hence, there will be shift in the LRAS and SRAS to the left. So, the LRAS₀ shift to LRAS₁ and the SRAS will still be expecting a better prospect in the future leading to the shift to SRAS₁ . Hence option third is correct.