The rational expectations equilibrium approach to macroeconomics
A)stresses the importance of market imperfections in determining the outcome of macroeconomic policies
B)asserts that monetary policy can do little to affect output or unemployment unless it is unanticipated
C)implies that macroeconomic policy works only when the public completely understands it
D)ignores the microeconomic decision making process of households and firms
E)was first developed in the 1960s but was soon discarded since most economists believed that it is unimportant to incorporate microeconomic foundations into macroeconomics

Question

Quizplus · Accepted Answer

The rational expectations equilibrium approach to macroeconomics asserts that monetary policy can do little to affect output or unemployment unless it is unanticipated. This means that if the public anticipates the policy, they will adjust their behavior accordingly and negate any intended effects of the policy. Therefore, unexpected policy actions are necessary to affect the economy.

The Rational Expectations Equilibrium Approach to Macroeconomics