According to the concept of rational expectations

Question

Quizplus · Accepted Answer

Budget deficits are irrelevant to output in the short-run if people have rational expectations. This is because people will anticipate the future effects of the deficit and adjust their behavior accordingly. For example, if people expect that a budget deficit will lead to higher inflation in the future, they will demand higher wages today to compensate for the expected loss in purchasing power. This will offset the expansionary effects of the deficit and prevent it from having a significant impact on output.

According to the Concept of Rational Expectations