The theory of rational expectations contends that policy activism is:
A) not warranted, because we don't know enough about the workings of the economy to stabilize it.
B) not warranted; the public defeats discretionary policies because everyone expects them and therefore their effectiveness is thwarted.
C) warranted because discretionary policies have a strong effect on real output.
D) warranted because expectations are rational only in the short run.

Question

Quizplus · Accepted Answer

The theory of rational expectations suggests that policies are not effective because people have rational expectations and will adjust their behavior accordingly. Therefore, any attempt at policy activism will be defeated because the public already expects it and will adjust their behavior in anticipation of it.

The Theory of Rational Expectations Contends That Policy Activism Is