Believers in the hypothesis of rational expectations argue that:
A)expansionary fiscal and monetary policy can reduce unemployment without creating inflation.
B)a trade-off exists between unemployment and inflation even in the long run.
C)the Phillips curve is vertical even in the short run for expected changes in inflation.
D)the Phillips curve is downward sloping even in the long run.

Question

Believers in the hypothesis of rational expectations argue that:
A)​expansionary fiscal and monetary policy can reduce unemployment without creating inflation.
B)​a trade-off exists between unemployment and inflation even in the long run.
C)​the Phillips curve is vertical even in the short run for expected changes in inflation.
D)​the Phillips curve is downward sloping even in the long run.

Quizplus · Accepted Answer

Believers in rational expectations argue that people adjust their expectations for inflation based on past experience and also take into account any anticipated changes in policy. This means that the Phillips curve, which shows the relationship between unemployment and inflation, is vertical in the short run for expected changes in inflation, as people adjust their behavior accordingly. Therefore, choice C is the correct answer.

Believers in the Hypothesis of Rational Expectations Argue That