Rational choice theory

What usually happens when the price of something rises, according to the text?

• People will supply less of it and buy more of it.

• People will supply more of it and buy less of it.

• People will supply and buy the same amount.

• People will stop buying and supplying it completely.

If people expect inflation to go up, what do they usually do?

• Ask for lower wages

• Ask for higher wages

• Spend less money

• Move to another country

What do people with lots of money do if they see interest or exchange rates falling in their country?

• Spend more money in their country

• Move their money out of the country

• Save more money in local banks

• Buy more goods

According to the text, what do governments often assume when making economic policies?

• People act randomly

• People act rationally

• People always follow the crowd

• People ignore prices

Which of the following best describes a situation where people "follow the crowd"?

• Making decisions based on careful research

• Relying on others to know what they’re doing

• Always acting in their own best interest

• Ignoring what others do

Why might people not always do what is best for them, according to the text?

• They always have perfect information

• They sometimes think they know all the facts or the facts are too complicated

• They never follow the crowd

• They always act rationally

What is an example from the text of people not understanding the full situation in the economy?

• People buying more when prices rise

• People not knowing what was going on with cheap mortgages in 2007

• People moving money out of the country

• People asking for higher wages

Based on the text, why might some lenders have continued to sell cheap mortgages before 2007?

• They believed the government would rescue them if there was a problem

• They thought prices would never change

• They wanted to help their customers

• They did not care about profits

Suppose a government sets a policy expecting people to act rationally, but people instead follow the crowd. What could be a possible consequence?

• The policy works exactly as planned

• The policy may not have the intended effect

• People always benefit from the policy

• Prices never change

Imagine you are a bank customer in 2007 and see many people taking out cheap mortgages. Using evidence from the text, what might be a wise action to take?

• Follow the crowd and take out a mortgage without understanding the risks

• Investigate the situation and make a decision based on all available facts

• Ignore what is happening in the market

• Assume the government will always protect you