1. Present a model with rational expectations and the new Keynesian supply function. If policy makers and the public have the same information, can stabilization policies in a stochastic context affect aggregate demand and output (i) in the short run, (ii) in the long run?
2. Why do models with rational expectations have dif?culty in explaining the persistence of output from its trend and unemployment from the natural rate? What are some of the reasons given for this persistence? If this persistence were incorporated in them, what would be their implications for the effectiveness of monetary policy: could activist monetary policy stabilize output and the unemployment rate? Discuss in the context of a speci?c model embodying such persistence.