Some economists believe that when workers and firms come to expect an expansionary monetary policy and the resulting inflation,
A)they act so as to prevent the inflation from occurring
B)their actions lead to a further increase in output
C)the expansionary monetary policy will have no effect on either output or employment
D)the monetary authority will be forced to cancel its planned expansionary policy
E)both output and employment will increase even more than was originally planned

Question

Quizplus · Accepted Answer

When workers and firms anticipate expansionary monetary policy and the resulting inflation, they adjust their behavior accordingly, such as by demanding higher wages or increasing prices. This can neutralize the policy's intended effects, leading to no change in real output or employment, as predicted by the rational expectations theory.

Some Economists Believe That When Workers and Firms Come to Expect