According to the theory of rational expectations, ____ inflationary expectations encourage businesses and households to ____ their demand for loanable funds in order to borrow and make planned expenditures increase.

Question

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According to the theory of rational expectations, higher inflationary expectations lead businesses and households to anticipate higher future prices, which encourages them to borrow and spend now before prices increase further. Hence, higher inflationary expectations lead to an increase in demand for loanable funds, as opposed to a reduction, as stated in option A. Lower inflationary expectations, as stated in options C and D, would also dampen demand for loanable funds.

According to the Theory of Rational Expectations, ____ Inflationary Expectations