Proponents of rational expectations theory have argued that,in the most extreme case,if policymakers are credibly committed to reducing inflation,and if rational people understand that commitment and quickly lower their inflation expectation,the sacrifice ratio could be as small as what?
A)0
B)1
C)4
D)5

Question

Quizplus · Accepted Answer

The proponents of the rational expectations theory argue that if policymakers are credible in their commitment to reducing inflation and people believe that commitment, then they will quickly adjust their inflation expectations. This means that there will be no costs associated with reducing inflation, and the sacrifice ratio will be zero. In other words, the economy can achieve lower inflation without sacrificing any output.

Proponents of Rational Expectations Theory Have Argued That,in the Most