To the extent that monetary policy is fully anticipated by workers and firms, it has _____
A) no effect on the level of output; it affects only the price level.
B) an effect on the level of output; it affects the price level.
C) no effect on the level of output; it affects only employment.
D) an effect on the level of output; it affects employment.
E) no effect on the level of output; it affects only output.

Question

Quizplus · Accepted Answer

If monetary policy is fully anticipated, workers and firms would adjust their behavior accordingly, and the economy would adjust to the new equilibrium. As a result, there would be no effect on the level of output, but only on the price level. This is because changes in monetary policy would be reflected in changes to the nominal wage rate, which would be integrated into prices. Therefore, option A is the correct answer.

To the Extent That Monetary Policy Is Fully Anticipated by Workers