According to the theory of rational expectations, the government can influence output
A) with appropriate fiscal and monetary policy.
B) in the short run, but not in the long run.
C) without affecting the price level.
D) only by making unexpected changes that impact aggregate demand.

Question

Quizplus · Accepted Answer

According to the theory of rational expectations, individuals make decisions based on their rational expectations of future events. Thus, any expected changes in government policy will have no impact on output. Only unexpected changes in policy that impact aggregate demand may temporarily influence output.

According to the Theory of Rational Expectations, the Government Can