If people have ________________, an announced monetary contraction by the Fed that is credible could reduce inflation with little or no increase in inflation.

Question

Quizplus · Accepted Answer

Rational expectations refer to the idea that individuals form expectations about the future based on all available information, including information about government policy. If people have rational expectations, they will anticipate the effects of monetary policy on inflation and adjust their behavior accordingly. Therefore, if the Fed announces a credible monetary contraction, individuals will expect lower inflation and adjust their behavior accordingly, leading to a reduction in inflation with little or no increase in unemployment.

If People Have ________________, an Announced Monetary Contraction by the Fed