1) A policy maker sees a trade-off between inflation and unemployment

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1) A policy maker sees a trade-off between inflation and unemployment. She tries to base the policy on this and discovers that the trade-off no longer works. This observation can be best described by:

a) The time inconsistency problem.

b) The credibility problem.

c) The Ricardian equivalence problem.

d) The Lucas critique problem.

2) Which of the following is not one of the precepts that follow from the DSGE model?

a) Credibility is important

b) Rules have certain advantages over discretion

c) People are dumb and do not learn from past mistakes

d) People are smart, and policy had better take that into account