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Figure: Understanding Expectation Theories
-(Figure: Understanding Expectation Theories)Assume the economy is at point c.According to the theory of rational expectations,if the Fed announces and then starts a plan to practice contractionary policy,the economy will move from point c:

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Use the following to answer questions 
Figure: Understanding Expectation Theories 
-(Figure: Understanding Expectation Theories)Assume the economy is at point c.According to the theory of rational expectations,if the Fed announces and then starts a plan to practice contractionary policy,the economy will move from point c:

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According to the theory of rational expectations, individuals form expectations about future economic conditions and incorporate this into their current decision making. Therefore, if the Fed announces a contractionary policy, individuals will adjust their behavior accordingly, causing the economy to move directly to point d. As a result, choices A, B, and D are incorrect.

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