The proponents of rational expectations believe that
A) there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy.
B) macro-policies that stimulate demand and place upward pressure on the general level of prices will temporarily increase output and employment.
C) the inflationary side effects of expansionary policies will be anticipated quickly, and therefore, even their short-run effects on real output and employment will be minimal.
D) discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.

Question

Quizplus · Accepted Answer

Proponents of rational expectations believe that the inflationary side effects of expansionary policies will be anticipated quickly, therefore their short-run effects on real output and employment will be minimal. This belief is based on the assumption that individuals make rational decisions based on all available information, including their expectations of future policies and economic conditions.

The Proponents of Rational Expectations Believe That