Problem_Set_5_Wilson_Lisa

4 compare and contrast the impact of an unexpected

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Yes, I believe that price stability should be the goal of monetary policy. 4. Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short run? Are the long-run implications different? Explain. An unexpected shift to a more expansionary monetary policy will temporarily rouse output and employment with adaptive expectations. On the other hand, with rational expectations, errors made by decision makers will be random because they typically do not tend to repeat errors of the past, thus will be unpredictable. Both rational and adaptive expectations show that shifts to a sustained expansionary policy inevitably leads to inflation and fails to permanently increase output and employment. With adaptive expections, aggregate demand will increase and lead to an increase in GDP in the short run and a slight increase in price. With rational expectations, aggregate demand, prices,
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and production cost will increase. Although prices increase, real output does not (both in long run and short run). This assignment is due by 11:59 p.m. (ET) on Monday of Module/Week 6.
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