Under rational expectations, government policy can be effective:
A) if it is rationally thought out before implementation.
B) if it is anticipated, so people can make realistic preparations.
C) if it surprises people.
D) whenever the economy reacts rationally to the decision.

Question

Quizplus · Accepted Answer

Under rational expectations, individuals make forecasts that on average do not differ from the rational expectations of future values. Therefore, if a government policy is anticipated, individuals will adjust their behavior in advance, neutralizing the policy's intended effect. A policy can only be effective if it surprises people, as they won't have adjusted their behavior in anticipation of the policy.

Under Rational Expectations, Government Policy Can Be Effective