Can a Keynesian still believe in an active counter-cyclical policy if she adopts the assumption of rational expectations?
A) No, it destroys the case for active policy.
B) Yes, so long as she continues to assume wage and price rigidity.
C) Yes, if she also adopts the assumption of wage and price flexibility.
D) Yes, if she assumes that economic policy shifts are anticipated in advance.

Question

Quizplus · Accepted Answer

Keynesians can still advocate for active counter-cyclical policies under the assumption of rational expectations if they continue to assume wage and price rigidity. This is because wage and price stickiness can prevent the economy from self-correcting quickly, thus providing a rationale for government intervention to stabilize the economy.

Can a Keynesian Still Believe in an Active Counter-Cyclical Policy