Under the adaptive expectations hypothesis, which of the following is the most likely short-run effect of a move to a more expansionary monetary policy?
A) higher prices and no change in real output
B) higher prices and expansion in real output
C) no change in prices but an expansion in real output
D) no change in either prices or real output

Question

Quizplus · Accepted Answer

Under adaptive expectations, people adjust their expectations based on past experiences. In the short run, an expansionary monetary policy can lead to higher demand, resulting in both higher prices and an increase in real output as firms respond to increased demand before expectations fully adjust.

Under the Adaptive Expectations Hypothesis, Which of the Following Is