From a rational expectations perspective, an easy money policy is likely to be completely
A) ineffective unless the increase in the money supply is unanticipated.
B) effective unless the increase in the money supply is unanticipated.
C) ineffective unless the increase in the money supply is anticipated.
D) effective unless the increase in the money supply is anticipated.

Question

Quizplus · Accepted Answer

According to rational expectations theory, individuals and firms base their decisions on all available information, including their expectations of future economic conditions. Therefore, if an easy money policy is expected or anticipated, individuals and firms will adjust their behavior accordingly, negating the effects of the policy. However, if the increase in the money supply is unanticipated, it can have a temporary effect on the economy before expectations adjust, making easy money policy ineffective unless the increase in money supply is unanticipated.

From a Rational Expectations Perspective, an Easy Money Policy Is