The main policy conclusion of the rational expectations theory is
A) fiscal policy lags are so long and variable that such policy is worthless, but monetary policy can stimulate output.
B) monetary policy lags are so long and variable that such policy is worthless, but fiscal policy can stimulate output.
C) both monetary and fiscal policy will affect real output if firms and households correctly anticipate the effects of changes in government policy.
D) neither monetary nor fiscal policy will affect real output if firms and households correctly anticipate the effects of changes in government policy.

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that if firms and households anticipate government policy changes correctly, they will adjust their behavior accordingly, rendering both monetary and fiscal policies ineffective in changing real output.

The Main Policy Conclusion of the Rational Expectations Theory Is