According to the rational expectations school, which of the following can affect the levels of output and employment?
A) an expansionary monetary policy, if it is fully anticipated
B) a contractionary monetary policy, if it is fully anticipated
C) monetary policy that is unanticipated
D) fiscal policy that is anticipated

Question

According to the rational expectations school, which of the following can affect the levels of output and employment?  
A) an expansionary monetary policy, if it is fully anticipated 
B) a contractionary monetary policy, if it is fully anticipated 
C) monetary policy that is unanticipated 
D) fiscal policy that is anticipated

Quizplus · Accepted Answer

The rational expectations school posits that only unanticipated policy moves, such as unexpected changes in monetary policy, can affect the levels of output and employment because individuals and businesses adjust their behavior based on their expectations of future policy actions. If a policy is anticipated, economic agents will have already adjusted their actions, negating the policy's intended effects on output and employment.

According to the Rational Expectations School, Which of the Following