If firms and workers have rational expectations,including knowledge of the policy being used by the Federal Reserve

Question

Quizplus · Accepted Answer

If firms and workers have rational expectations and knowledge of the policy being used by the Federal Reserve, they will adjust their behavior accordingly, mitigating the effectiveness of expansionary monetary policy. This is known as the "rational expectations trap," which suggests that active stabilization policy may not be effective in the long run. Therefore, choice B is the best answer.

If Firms and Workers Have Rational Expectations,including Knowledge of the Policy