According to rational expectations theory,
A) increasing the money supply to reduce unemployment will always be successful.
B) decreasing the money supply to reduce unemployment will usually be successful.
C) increasing the money supply to reduce unemployment will not be successful because of an offsetting decrease in prices.
D) increasing the money supply to reduce unemployment will not be successful because of an offsetting increase in prices.

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals will anticipate the effects of monetary policy. If the money supply is increased to reduce unemployment, people will expect higher prices in the future. This expectation can lead to immediate increases in prices, offsetting the intended stimulative effect on employment.

According to Rational Expectations Theory