From a rational expectations perspective, an easy money policy is likely to be completely:
A) Ineffective unless the increase in the money supply is unanticipated
B) Effective unless the increase in the money supply is unanticipated
C) Ineffective unless the increase in the money supply is anticipated
D) Effective unless the increase in the money supply is anticipated

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals make decisions based on their expectations of future events. Therefore, if the central bank announces an easy money policy that leads to an anticipated increase in the money supply, individuals will adjust their behavior accordingly, resulting in no real change in economic activity. However, if the increase in the money supply is unanticipated, individuals will not have adjusted their behavior, and the easy money policy may be more effective in stimulating economic activity. Therefore, an easy money policy is likely to be completely ineffective unless the increase in the money supply is unanticipated. Thus, option A is the correct choice.

From a Rational Expectations Perspective, an Easy Money Policy Is