CFA Practice Question

CFA Practice Question

An economist makes the following statements about the role of expectations in influencing fiscal and monetary policy. Which of his statements is TRUE?
A. If a decrease in the growth of the money supply is fully anticipated, prices and wages will quickly decrease.
B. If the long run impact of the policy is the same whether or not the policy is anticipated or unanticipated, the adjustment path does not matter.
C. If the decrease in the growth of the money supply is a surprise, decision makers correctly perceive that the decrease in the money supply is a decrease in demand.
Explanation: For the examination, pay attention to the difference between the economy's adjustment process when the changes in supply and demand are fully anticipated and when they are unanticipated. The paths (and short run impacts) are very different! If the change in policy is anticipated, the public is better informed about the reason for the change and price, and wages will adjust more quickly (assuming flexible markets) in the proper direction. If the change is a surprise, decision makers will incorrectly perceive a decrease in the money supply as an increase in demand when the decrease is really driven by government action and will affect the price level.

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cfastudypl Thanks AN!
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