According to the rational expectations theory, expansionary monetary policy is fully effective only if
A) the policy is anticipated by workers and firms.
B) aggregate supply shifts to the left.
C) the economy is operating at or above its potential output level.
D) policy makers follow through on their previously announced plans.
E) the effects of the policy are unexpected.

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that if economic agents anticipate the effects of expansionary monetary policy, they will adjust their behavior accordingly, rendering the policy ineffective. Therefore, for the policy to be fully effective, its effects must be unexpected.

According to the Rational Expectations Theory, Expansionary Monetary Policy Is