The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately:
A)5.
B)2.8.
C)1.
D)0.

Question

Quizplus · Accepted Answer

If people quickly adjust their expectations due to credible policy commitments, the economy can reduce inflation without a significant loss in output, leading to a sacrifice ratio of approximately 0.

The Rational-Expectations Point of View, in the Most Extreme Case