If expectations are rational, can monetary and fiscal policy makers accurately control the effects their policies have on unemployment?
A)Yes, provided they announce policies in advance.
B)Yes, both policies are effective in altering unemployment in the desired ways.
C)No, because these effects depend on whether and to what extent people are fooled by those policies.
D)No, only fiscal policy can alter unemployment.
E)No, only monetary policy can alter unemployment.

Question

Quizplus · Accepted Answer

Rational expectations suggest that people will adjust their behavior based on their expectations of the future, including their expectations of how monetary and fiscal policy will affect the economy. If people are able to accurately predict the effects of these policies, then policy makers may not be able to achieve their intended outcomes. This makes it difficult for monetary and fiscal policy makers to accurately control the effects of their policies on unemployment. Therefore, choice C is the correct answer.

If Expectations Are Rational, Can Monetary and Fiscal Policy Makers