Question 25 (2.38 points) B If expectations are adaptive, then what is the long-

Question

Question 25 (2.38 points) B If expectations are adaptive, then what is the long-run danger of an activist monetary policy? 1) Stagnant real gross domestic product (GDP) and high inflation. 2) Low real gross domestic product (GDP) growth and low unemployment. 3) High inflation and high unemployment. 4) Underestimated inflation and high unemployment. Save Question 26 (2.38 points) Which of the following best describes how contractionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model? ) Contractionary monetary policy directly pulls money out of the loanable funds market. This lowers the interest rate, which provides a larger incentive for firms to invest

Explanation / Answer

25 ) The asnwer is 3-) High Inflation and high unemployment,

because when the expectations are adaptive, inflation will reduce the unemployment rate in the short run but eventually, expectations adjust and then the central bank must has to increase inflation again just to stay ahead of the adjusting expectations to reduce more unemployment rate and this leads to more and more inflation. Worse yet, if the central bank tries to reduce inflation levels, expected inflation will exceed actual inflation, which will lead to increases in unemployment rates. activist monetary policy will lead to temporary increase in employment in short run but in long run it leads to high inflation and high unemployment.

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