According to rational expectations, monetary policy is:
A) always effective.
B) effective only if it is unexpected.
C) ineffective compared to fiscal policy.
D) effective only when fiscal policy accommodates it.

Question

Quizplus · Accepted Answer

Rational expectations theory argues that individuals form expectations about future economic conditions based on all available information, including about government policies. If monetary policy is expected, it can be built into people's expectations and therefore have little impact on the economy. Only unexpected changes in monetary policy can potentially alter people's behavior and have a significant impact. Therefore, monetary policy is only effective if it is unexpected.

According to Rational Expectations, Monetary Policy Is