Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more expansionary monetary policy?
A) In the short run, the real rate of output will be unaffected, but in the long run, it will increase.
B) In the short run, the real rate of output will increase, but in the long run, it will be unchanged.
C) There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher.
D) In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase.

Question

Quizplus · Accepted Answer

Under the adaptive expectations hypothesis, it is assumed that people will adjust their expectations of future inflation based on past experience. In the short run, a shift to a more expansionary monetary policy will lead to an increase in output as people increase their consumption and investment due to lower interest rates. However, over time, people will adjust their expectations and the increase in demand will lead to higher prices and inflation, which will offset the initial boost in output. Therefore, the real rate of output will be unchanged in the long run.

Under the Adaptive Expectations Hypothesis, Which of the Following Is