Suppose the Bank of Canada announces a policy of rapid growth in the money supply, but then puts the brakes on money expansion without any announcement.According to the rational expectations school, what will the short-run result likely be?

Question

Quizplus · Accepted Answer

According to the rational expectations school, individuals and businesses anticipate changes in monetary policy and adjust their behavior accordingly. Therefore, if the Bank of Canada abruptly puts the brakes on money expansion, individuals and businesses will likely anticipate a decrease in aggregate demand, leading to a drop in spending and economic activity. This is why the short-run result is expected to be an unexpected drop in aggregate demand.

Suppose the Bank of Canada Announces a Policy of Rapid