Self-Check Questions

1. Do rational expectations tend to look back at past experience while adaptive expectations look ahead to the future? Explain your answer.

2. Legislation proposes that the government should use macroeconomic policy to achieve an unemployment rate of zero percent, by increasing aggregate demand for as much and as long as necessary to accomplish this goal. From a neoclassical perspective, how will this policy affect output and the price level in the short run and in the long run? Sketch an aggregate demand/aggregate supply diagram to illustrate your answer. Hint: revisit Figure 26.4.

3. Would it make sense to argue that rational expectations economics is an extreme version of neoclassical economics? Explain.

4. Summarize the Keynesian and Neoclassical models.

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