According to rational expectations theory:
A)a large reduction in unemployment can be achieved with a relatively small increase in inflation.
B)people are not easily fooled by changes in government fiscal policy.
C)inflation rates that rise 3 percentage points each year will keep unemployment below its natural rate for a sustained period of time.
D)the Phillips curve will slope downward to the right, if people correctly anticipate the inflation rate.
E)none of the above is true.

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals have rational expectations about future economic conditions and are not easily fooled by changes in government fiscal policy. This means that expansionary fiscal policies may not be as effective in reducing unemployment as previously thought.

According to Rational Expectations Theory