The rational expectations equilibrium approach claims that the price level can be reduced through restrictive monetary policy without causing a lengthy and deep recession
A)if the monetary policy change is announced in advance
B)since workers will increase their work effort as soon as they discover that actual prices are below expected prices
C)since even unanticipated money supply changes have only a short-lived influence on economic activity and are soon fully reflected in price changes
D)since people will revise their forecasts of wages and prices as soon as they find out how much money supply has changed
E)all of the above

Question

Quizplus · Accepted Answer

The rational expectations equilibrium approach suggests that if monetary policy changes are anticipated and people adjust their expectations accordingly, the impact on economic activity can be minimized. This includes scenarios where the policy is announced in advance (A), where workers adjust their effort based on actual versus expected prices (B), and where adjustments to forecasts of wages and prices are made quickly after changes in the money supply (D). Even unanticipated changes are believed to have only short-lived effects because adjustments in expectations and prices happen swiftly (C).

The Rational Expectations Equilibrium Approach Claims That the Price Level