Question: Question 4. Explain the difference between Adaptive Expectations and Rational Expecta- tions. What is the implication of Rational Expectations theory on central bank communi- cation?

tions. What is the implication of Rational Expectations theory on central bank

Question 4. Explain the difference between Adaptive Expectations and Rational Expecta- tions. What is the implication of Rational Expectations theory on central bank communi- cation? (6 points) Question 5. During an election term, the government increases its spending temporarily. Show the effect of this shock on the economy using the ISMP-PC model. Explain how and why you would change the interest rate in response to this shock. Make sure to draw the ISMP diagram and Phillips curve. (10 points)

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