According to the rational expectations school,if the Fed announces a policy of rapid growth in the money supply,but then puts the brakes on money expansion without any announcement,the short-run result is likely to be
A)an unexpected surge in aggregate demand
B)an unexpected drop in aggregate demand
C)an anticipated surge in aggregate demand
D)an anticipated drop in aggregate demand
E)no change in aggregate demand

Question

Quizplus · Accepted Answer

According to the rational expectations school, individuals have rational expectations based on all available information, including past experiences, and they may anticipate the Fed's future policy actions. Therefore, if the Fed announces a policy of rapid growth in the money supply, individuals may anticipate higher inflation and adjust their expectations accordingly. However, if the Fed then puts the brakes on money expansion without any announcement, individuals may still hold onto their previously adjusted expectations, leading to an unexpected drop in aggregate demand due to lower inflation expectations.

According to the Rational Expectations School,if the Fed Announces a Policy