If rational expectations cause people's price expectations to be generally correct,active policy will influence the price level but not output.

Question

Quizplus · Accepted Answer

Rational expectations assume that economic agents form expectations about future prices based on all available information, including knowledge of past policy actions. Therefore, if policy actions are predictable and expectations are rational, active policy may influence the price level but not output, as people will already have factored in the expected policy actions. However, if expectations are not rational, active policy may still affect both prices and output.

If Rational Expectations Cause People's Price Expectations to Be Generally