1. How does the theory of rational expectations differ from that of adaptive expectations?

A. Adaptive expectations reflect the cumulative impact of budget deficits and surpluses, whereas rational expectations incorporate all available information about the probable effects of current and future economic events.

B. Adaptive expectations incorporate data from the recent past, whereas rational expectations incorporate all available information about the probable effects of current and future economic events.

C. Adaptive expectations reflect the cumulative impact of budget deficits and surpluses, whereas rational expectations include the national debt owed to domestic and foreign investors.

D. Rational expectations incorporate data from the recent past, whereas adaptive expectations incorporate all available information about the probable effects of current and future economic events.

2. Macro policy-makers use the index of leading indicators to (eliminate the administrative lag/eliminate the recognition lag/time a change properly)

3. Consider the following economics situation: Prices are stable and have been stable for the last four years.

The actual rate of unemployment (exceeds/is equal to/is less than) the natural rate of unemployment.

4. Are the implications of the impact of an unexpected shift to a more expansionary monetary policy different under the rational and adaptive expectations hypotheses in the short run?

A. No, because under both theories, people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy.

B. No, because under both theories, there is a significant time lag before people come to expect the inflation and incorporate it into their decision making.

C. Yes, because under rational expectations, there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the adaptive expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy.

D. Yes, because under adaptive expectations, there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the rational expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy.