With rational expectations, a policy that would increase AD would lead to:
A)higher inflation and higher real output in the short run.
B)higher inflation and lower real output in the short run.
C)higher inflation and an indeterminate effect on real output in the short run, if people's expectations were correct.
D)higher inflation and no change in real output, if people's expectations were correct.

Question

Quizplus · Accepted Answer

With rational expectations, people anticipate the effects of policy changes, leading to adjustments in behavior that neutralize the impact on real output, resulting in higher inflation but no change in real output.

With Rational Expectations, a Policy That Would Increase AD Would