If expectations are rational, how can government influence unemployment in a predictable way?
A)with the normal tools, used in the normal fashion
B)with fiscal policy; monetary policy will not work
C)with monetary policy; fiscal policy will not work
D)with surprise changes in policy only

Question

If expectations are rational, how can government influence unemployment in a predictable way?
A)​with the normal tools, used in the normal fashion
B)​with fiscal policy; monetary policy will not work
C)​with monetary policy; fiscal policy will not work
D)​with surprise changes in policy only

Quizplus · Accepted Answer

When expectations are rational, individuals and businesses anticipate the effects of government policies on the economy. Therefore, standard policy tools may become ineffective in influencing unemployment as people adjust their behavior in anticipation of these policies. The only way for the government to influence unemployment in a predictable manner under these conditions is through surprise changes in policy, as these cannot be anticipated and people do not have time to adjust their expectations and behaviors accordingly.

If Expectations Are Rational, How Can Government Influence Unemployment in a Predictable