According to rational expectations theory, instantaneous market adjustments make
A) expansionary economic policy more effective in increasing output.
B) expansionary economic policy ineffective in increasing output.
C) economic policy more rational and more stable.
D) economic policy less rational and less stable.

Question

Quizplus · Accepted Answer

Rational expectations theory posits that individuals form expectations based on all available information, including their understanding of economic policies. Therefore, if the government implements expansionary economic policies, individuals will anticipate the resulting increase in inflation and adjust their behavior (such as increasing prices and wages) accordingly. This will offset the intended effects of the policy, making it ineffective in increasing output.

According to Rational Expectations Theory, Instantaneous Market Adjustments Make