If rational expectations are assumed, inflation can be reduced with no corresponding increase in unemployment.

Question

Quizplus · Accepted Answer

Rational expectations theory assumes that people make predictions of future economic conditions based on all available information. In this case, if the public expects inflation to increase, they will demand higher wages and prices, leading to a self-fulfilling prophecy of rising inflation. However, if the expectation of inflation is reduced, prices and wages will adjust accordingly, which can lead to a reduction in inflation without causing unemployment to increase.

If Rational Expectations Are Assumed, Inflation Can Be Reduced with No