According to the rational expectations view, the government has the ability to control the level of real output and unemployment:
A)only in the short run if it makes unexpected changes in aggregate demand
B)only in the short run if it announces policies well in advance so that expectations are affected
C)only in the long run if it shifts aggregate supply instead of aggregate demand
D)only in the long run if it uses monetary policy instead of fiscal policy
E)only in the long run when the aggregate supply curve is vertical

Question

Quizplus · Accepted Answer

According to the rational expectations view, individuals will adjust their expectations about future conditions based on their perceptions of current policies. If the government makes unexpected changes in aggregate demand, it may be able to influence real output and unemployment in the short run. However, in the long run, expectations will adjust, and the economy will return to its natural level of output and unemployment. Therefore, the government's ability to control the level of real output and unemployment is limited to the short run when it makes unexpected changes in aggregate demand.

According to the Rational Expectations View, the Government Has the Ability