Which of the following best characterizes how economists of the rational expectations school view the economy?
A) They have no confidence in the ability of workers and firms to observe and react to economic events.
B) They have great faith in the ability of monetary policymakers to maintain a full employment economy with stable prices.
C) They believe that effective monetary policy can shift the potential level of output to the right.
D) They believe workers and firms make decisions based on what they think monetary policy will be in the future.

Question

Which of the following best characterizes how economists of the rational expectations school view the economy?  
A) They have no confidence in the ability of workers and firms to observe and react to economic events. 
B) They have great faith in the ability of monetary policymakers to maintain a full employment economy with stable prices. 
C) They believe that effective monetary policy can shift the potential level of output to the right. 
D) They believe workers and firms make decisions based on what they think monetary policy will be in the future.

Quizplus · Accepted Answer

Economists of the rational expectations school believe that individuals (workers and firms) make decisions based on their expectations of future monetary policy. They assume that people have rational expectations about the future and that any policy changes will be anticipated and factored into their decision-making. As a result, they tend to argue that monetary policy has limited ability to stabilize the economy in the short run.

Which of the Following Best Characterizes How Economists of the Rational