According to the theory of rational expectations, individuals will respond to expansionary monetary policy by predicting:
A) a lower rate of inflation.
B) a higher rate of inflation.
C) no change in the rate of inflation.
D) incorrectly what will happen to the price level and employment.

Question

Quizplus · Accepted Answer

The theory of rational expectations suggests that individuals will anticipate the effects of monetary policy on the economy. Therefore, in response to expansionary monetary policy, which typically aims to increase the money supply and stimulate economic activity, individuals would predict a higher rate of inflation as more money chases the same amount of goods and services, leading to price increases.

According to the Theory of Rational Expectations, Individuals Will Respond