According to adaptive expectations theory, expansionary monetary and fiscal policies to reduce the unemployment rate are:
A) useless in the long run.
B) useless in the short run.
C) ineffective on the price level.
D) successful at achieving the desired outcomes.

Question

Quizplus · Accepted Answer

According to adaptive expectations theory, people adjust their expectations for the future based on past experiences. Therefore, if expansionary monetary and fiscal policies are used to reduce the unemployment rate, people will adjust their expectations and demand higher wages, which will increase costs for firms, leading to higher prices and inflation. As a result, these policies are considered ineffective in the long run.

According to Adaptive Expectations Theory, Expansionary Monetary and Fiscal Policies