What is the main policy conclusion of the rational expectations school?
A) Fiscal policy lags are so long and variable that such policy is worthless, but monetary policy can be helpful.
B) Monetary policy lags are so long and variable that such policy is worthless, but fiscal policy can be helpful.
C) Both monetary and fiscal policy can be helpful if firms and households correctly anticipate the plans of policymakers.
D) Neither monetary nor fiscal policy is helpful if firms and households correctly anticipate the plans of policymakers.

Question

What is the main policy conclusion of the rational expectations school?  
A) Fiscal policy lags are so long and variable that such policy is worthless, but monetary policy can be helpful. 
B) Monetary policy lags are so long and variable that such policy is worthless, but fiscal policy can be helpful. 
C) Both monetary and fiscal policy can be helpful if firms and households correctly anticipate the plans of policymakers. 
D) Neither monetary nor fiscal policy is helpful if firms and households correctly anticipate the plans of policymakers.

Quizplus · Accepted Answer

The rational expectations school concludes that both monetary and fiscal policy are ultimately ineffective if households and firms can correctly anticipate the plans of policymakers. This is because any attempts to use policy instruments to manipulate the economy will already be factored into household and firm decision-making, leading to outcomes that match predictions made using rational expectations.

What Is the Main Policy Conclusion of the Rational Expectations