If individuals' expectations are formed adaptively
A) short-run unemployment rates will rise at first, then fall.
B) antirecessionary fiscal and monetary policies will not affect the price level.
C) the long-run Phillips curve slopes downward.
D) policy efforts to reduce the unemployment rate below the natural rate have only a temporary impact.
E) the aggregate supply curve is horizontal.

Question

Quizplus · Accepted Answer

If individuals' expectations are formed adaptively, then policy efforts to reduce the unemployment rate below the natural rate will only have a temporary impact because eventually expectations will adjust to the actual employment situation. This is known as the natural rate hypothesis.

If Individuals' Expectations Are Formed Adaptively