With rational expectations, a policy that would increase AD would lead to:
A)higher inflation and a higher real output in the long run if people's expectations were incorrect.
B)higher inflation and a lower real output in the long run if people's expectations were incorrect.
C)higher inflation and a higher real output in the short run if people's expectations were correct.
D)higher inflation and no change in real output in the short run if people's expectations were correct in the short run.
E)higher inflation and a lower real output in the short run if people's expectations were incorrect.

Question

Quizplus · Accepted Answer

With rational expectations, if people correctly anticipate the policy, they adjust their behavior accordingly, leading to higher inflation but no change in real output in the short run.

With Rational Expectations, a Policy That Would Increase AD Would