Which of the following statements is not consistent with the theory of rational expectations?
A) The Phillips curve is vertical.
B) Expansionary fiscal policy that is anticipated is ineffective even in the short run.
C) The aggregate supply curve is vertical.
D) People adjust slowly to changes in the inflation rate.
E) A downward-sloping Phillips curve does not exist for expected changes.

Question

Quizplus · Accepted Answer

The theory of rational expectations assumes that people adjust quickly to changes in the inflation rate, based on their rational expectations of future economic conditions. Therefore, statement D, which suggests that people adjust slowly to changes in inflation, is inconsistent with the theory of rational expectations.

Which of the Following Statements Is Not Consistent with the Theory