CFA Practice Question

CFA Practice Question

Which of the following statements is most likely incorrect?
A. Wages are sticky in Keynesian economics.
B. An increase in government spending is more likely to increase employment in Keynesian economics compared to Rational Expectations economics.
C. An increase in government spending is more likely to increase prices in Keynesian economics compared to Rational Expectations economics.
Explanation: In Rational Expectations people behave 'rationally', they compute the effects of government policy on investment and consumption decisions. This analysis leads them to expect increased government spending will result in inflation.

User Contributed Comments 1

User Comment
harrybay Rationalists will only expect inflation if economy is at full employment already. What they are much more likely to expect in an increase in taxes. If they anticipate a tax increase, firms a less likely to hire workers. So B is as good if not better as C as an answer.
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