Economists of the rational expectations school _____
A) have no confidence in the ability of workers and firms to observe and react to economic events.
B) believe that workers and firms behave the same regardless of what the Fed does.
C) have great faith in the ability of monetary policy makers to maintain full employment in an economy with stable prices.
D) believe that effective monetary policy can shift the potential level of output to the right.
E) believe that workers and firms make decisions based on what they think monetary policy will be in the future.

Question

Quizplus · Accepted Answer

Economists of the rational expectations school believe that individuals make decisions based on their expectations of future events, including their expectations of future monetary policy. This means that they take into account how the Fed's actions are likely to affect the economy, and adjust their own behavior accordingly. This can make it more difficult for the Fed to control the economy through monetary policy, as individuals may already be taking into account the Fed's actions before they even occur.

Economists of the Rational Expectations School _____