According to the theory of rational expectations,
A) workers' experience tells them that government action to lower unemployment will not affect inflation.
B) consumers and investors generally behave so that rationally formed government attempts to stimulate aggregate demand have their desired effects.
C) policy goals can be achieved more easily in the short run than in the long run.
D) workers' wage demands include anticipated inflation.

Question

Quizplus · Accepted Answer

According to the theory of rational expectations, workers and employers will take into account anticipated inflation when making wage and price decisions. This means that if the government tries to stimulate the economy to lower unemployment, workers will anticipate higher inflation and therefore demand higher wages to compensate. This can lead to a situation where government policies aimed at reducing unemployment are less effective than intended.

According to the Theory of Rational Expectations