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,which of the following is likely to be the short-run result?
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 will form expectations based on all available information, including past actions of the Fed. If the Fed announces a policy of rapid growth in the money supply but then puts the brakes on without any announcement, individuals will expect a continuation of the rapid growth in the money supply. However, if the Fed suddenly stops the expansion without warning, individuals will be surprised and will adjust their expectations, likely leading to a drop in aggregate demand in the short run.

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