1. Rational expectations Assume that people have rational expectations and that the economy is described by the stickyprice model. Explain why each of the following propositions is true: 1. Only unanticipated changes in the money supply affect real GDP. Changes in the money supply that were anticipated when prices were set do not have any real effects. 2. If the Bank of Canada chooses the money supply at the same time as people are setting prices, so that everyone has the same information about the state of the economy, then monetary policy cannot be used to systematically to stabilize output. Hence, a policy of keeping the money supply constant will have the same real effects as a policy of adjusting the money supply in response to the state of the economy (this is called the policy irrelevance proposition.) 3. If the Bank of Canada sets the money supply well after people have set prices, so the Bank of Canada collected more information about the state of the economy, then monetary policy can be used to systematically stabilize output.