Advocates of the rational-expectations approach predict that a credible policy to lower inflation will ______ the sacrifice ratio.
A) raise
B) lower
C) not change
D) sometimes raise and sometimes lower

Question

Quizplus · Accepted Answer

According to the rational-expectations approach, if a credible policy to lower inflation is implemented, it will lead to lower expectations of future inflation. As a result, inflationary pressures will decrease, and there will be less need for an aggressive tightening of monetary policy, resulting in a lower sacrifice ratio.

Advocates of the Rational-Expectations Approach Predict That a Credible Policy