According to rational expectations theory, predictable expansionary monetary and fiscal policies to reduce the unemployment rate are:
A) desirable because the result is to lower inflation.
B) harmful because the only result is higher inflation.
C) ineffective on the price level.
D) successful in reducing unemployment in the long run.

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals and businesses will anticipate the effects of monetary and fiscal policies. If a policy is predictable, people will adjust their behavior in advance, leading to inflation without reducing unemployment in the long run. This is because they expect that expansionary policies will lead to inflation and adjust their wage and price setting behavior accordingly, negating the intended stimulative effect on real economic activity.

According to Rational Expectations Theory, Predictable Expansionary Monetary and Fiscal