If people have rational expectations, an announced monetary contraction by the central bank that is credible could reduce inflation with little or no increase in unemployment.

Question

Quizplus · Accepted Answer

If people have rational expectations, they will anticipate the central bank's monetary contraction and adjust their behavior accordingly, leading to lower inflation without significant increases in unemployment. This is known as the expectations-augmented Phillips curve, which suggests that inflation is primarily driven by expectational factors rather than the unemployment rate alone.

If People Have Rational Expectations, an Announced Monetary Contraction by the Central