According to the rational expectations approach, an announcement that interest rates may be raised to curb inflation would likely cause businesses and households to:
A) put political pressure on officials to cancel the planned interest rate changes.
B) go along with the policy knowing that it is in their best interest to curb inflation.
C) immediately borrow and increase their spending to beat the rise in the interest rates.
D) reduce borrowing and depend more on the expenditure of saved income and earnings.

Question

Quizplus · Accepted Answer

DRational expectations suggest that individuals and businesses will act in anticipation of future events to optimize their outcomes. If interest rates are expected to rise, they might borrow more now to avoid higher costs later (C), and similarly, they might reduce borrowing to adapt to the expected higher interest costs, relying more on savings and current income (D).

According to the Rational Expectations Approach, an Announcement That Interest