If firms and workers have rational expectations, including knowledge of the policy being used by the Bank of Canada,

Question

Quizplus · Accepted Answer

When firms and workers have rational expectations, they are able to anticipate and adjust to any changes in the policy used by the Bank of Canada. This means that any expansionary monetary policy will be anticipated, and therefore, will be offset by increased inflation expectations, leading to higher nominal interest rates. As a result, the effectiveness of expansionary monetary policy is reduced and may even be completely ineffective. Therefore, choice B is the best answer.

If Firms and Workers Have Rational Expectations, Including Knowledge of the Policy