Proponents of rational expectations theory argued that,in the most extreme case,if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations,the sacrifice ratio could be as small as
A)0.
B)1.
C)4.
D)5.

Question

Quizplus · Accepted Answer

Proponents of rational expectations theory argued that with credible commitment by policymakers to reducing inflation and rational people quickly adjusting their inflation expectations, the sacrifice ratio could be reduced to zero. This is because expectations play a crucial role in determining economic outcomes, and if people expect lower inflation, they would demand lower wage increases, and businesses would be less likely to raise prices, leading to a smoother and quicker reduction in inflation without the need for large output losses.

Proponents of Rational Expectations Theory Argued That,in the Most Extreme