According to the rational expectations school, what will be the effect of a correctly anticipated expansionary monetary policy?
A) Real output will increase in the short run only.
B) Prices and real output will remain the same.
C) Prices will decrease and real output will decrease.
D) A movement toward a higher price level will occur.

Question

According to the rational expectations school, what will be the effect of a correctly anticipated expansionary monetary policy?  
A) Real output will increase in the short run only. 
B) Prices and real output will remain the same. 
C) Prices will decrease and real output will decrease. 
D) A movement toward a higher price level will occur.

Quizplus · Accepted Answer

The rational expectations school posits that if an expansionary monetary policy is correctly anticipated, individuals will adjust their behavior in expectation of higher future prices, leading directly to a movement toward a higher price level without necessarily increasing real output in the short run.

According to the Rational Expectations School, What Will Be the Effect