Studying alternative theories of how people form expectations is particularly relevant to monetary policy because
A) if people fully expect inflation to occur,the effects of monetary policy are more widespread.
B) monetary policy can only have real effects on the economy if people fully expect inflation.
C) unexpected inflation cause prices to be flexible.
D) the effects of expected inflation are completely different from the effects of unexpected inflation.
E) expected inflation causes prices to become sticky.

Question

Quizplus · Accepted Answer

Understanding how people form expectations is crucial because the effects of monetary policy differ significantly depending on whether inflation is expected or unexpected. Expected inflation is often incorporated into contracts and pricing, while unexpected inflation can lead to more abrupt economic adjustments.

Studying Alternative Theories of How People Form Expectations Is Particularly