If the economy experiences an unanticipated demand shock and households and firms have rational expectations,there is
A) no trade-off between unemployment and inflation in either the short run or the long run.
B) a trade-off between unemployment and inflation in the long run, but not in the short run.
C) a trade-off between unemployment and inflation in the short run, but not in the long run.
D) a trade-off between unemployment and inflation in both the short run and the long run.

Question

Quizplus · Accepted Answer

With rational expectations, households and firms anticipate the effects of policy changes, leading to a short-run trade-off between unemployment and inflation, but in the long run, expectations adjust, eliminating the trade-off.

If the Economy Experiences an Unanticipated Demand Shock and Households