Proponents of rational expectations theory have argued that, in the most extreme case, if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectation, the sacrifice ratio could be as small as what?
A)0
B)1
C)4
D)5

Question

Quizplus · Accepted Answer

Proponents of rational expectations theory argue that if policymakers are credible in their commitment to reducing inflation and people quickly adjust their expectations accordingly, there may not be any sacrifice ratio at all. This is because if people expect low inflation, they will act accordingly, and the need for harsh policies to reduce inflation will be minimized. Therefore, in the most extreme case, the sacrifice ratio could be 0.

Proponents of Rational Expectations Theory Have Argued That, in the Most