The rational expectations approach asserts that, starting from a long-run equilibrium situation, if a restrictive monetary policy is announced and implemented, the economy will
A)move rapidly to a new equilibrium without a notable recession
B)suffer a long and deep recession before reaching a new equilibrium
C)remain at the same level of inflation since government policies are always ineffective
D)move slowly to a new equilibrium since wages tend to adjust slowly
E)fail to adjust since the policy was anticipated

Question

Quizplus · Accepted Answer

The rational expectations approach assumes that individuals have rational expectations and can accurately predict how government policies will affect the economy. Therefore, if a restrictive monetary policy is announced and implemented, individuals will adjust their behavior accordingly and the economy will move towards a new equilibrium without a notable recession.

The Rational Expectations Approach Asserts That, Starting from a Long-Run