If people's expectations of inflation are formed rationally rather than based on adaptive expectations and if policymakers make a credible policy move to reduce inflation, then the costs of reducing inflation will be ______ traditional estimates of the sacrifice ratio.
A) much higher than
B) much lower than
C) exactly equal to
D) approximately two percent greater than

Question

Quizplus · Accepted Answer

If people's expectations are rational, they would adjust their behaviour accordingly when they see credible policy moves, meaning that reducing inflation would be less costly than traditional estimates of the sacrifice ratio.

If People's Expectations of Inflation Are Formed Rationally Rather Than