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 only long-run impact of a change in monetary policy is a higher price level.
D)the long run aggregate supply curve is upward sloping.
E)when a change is correctly anticipated, expansionary fiscal policy changes real output.

Question

Quizplus · Accepted Answer

According to the rational expectations hypothesis, individuals form expectations about future economic outcomes based on all available information, including past trends and current policy decisions. Therefore, if individuals expect a change in monetary policy, they will adjust their behavior accordingly, negating any long-term impact on output or employment. The only lasting effect of a change in monetary policy is a change in the price level.

Believers in the Hypothesis of Rational Expectations Argue That