Why does the rational expectations school advocate the passive rule of a fixed-growth-rate monetary policy?
A) because the information needed to pursue an active policy is insufficient
B) because the economy is NOT in bad enough shape to require active intervention
C) because people render active policy ineffective by figuring out what the policy is going to be and taking actions to offset it
D) because people prefer to put their major emphasis on an active fiscal policy

Question

Why does the rational expectations school advocate the passive rule of a fixed-growth-rate monetary policy?  
A) because the information needed to pursue an active policy is insufficient 
B) because the economy is NOT in bad enough shape to require active intervention 
C) because people render active policy ineffective by figuring out what the policy is going to be and taking actions to offset it 
D) because people prefer to put their major emphasis on an active fiscal policy

Quizplus · Accepted Answer

The rational expectations school argues that people can anticipate and adjust their behavior in response to changes in economic policy. Therefore, any attempt at an active monetary policy would likely be rendered ineffective due to individuals taking actions to offset it. The passive rule of a fixed-growth-rate monetary policy is advocated as it provides stability and predictability for individuals' expectations, which helps to prevent excessive responses to policy changes.

Why Does the Rational Expectations School Advocate the Passive Rule