A conclusion of the theory of rational expectations is that, in the short run, the impact of discretionary fiscal policies designed to shift the AD curve to the right will:
A)result in an increase in the demand for money once people's expectations have been accounted for.
B)shift the AD curve in the opposite direction intended once people's expectations have been accounted for.
C)result in no significant change in real or nominal GDP or employment once the change is anticipated.
D)result in a change in real output in the intended direction if the policy is anticipated.
E)result in a change in real output in the long run if the policy is unanticipated.

Question

Quizplus · Accepted Answer

The theory of rational expectations posits that people will adjust their expectations based on anticipated policy changes, which will in turn offset any potential short-run effects of the policy. Therefore, discretionary fiscal policies designed to shift the AD curve to the right will result in no significant change in real or nominal GDP or employment once the change is anticipated.

A Conclusion of the Theory of Rational Expectations Is That