According to rational expectations theory, discretionary monetary and fiscal policy will be ineffective primarily because of the:
A) Successes of macroeconomic policy makers
B) Inability of policy makers to time decisions properly
C) Reaction of the public to the expected effects of policy changes
D) Slow impact of policy to stimulate changes in real output and employment

Question

Quizplus · Accepted Answer

Rational expectations theory argues that individuals base their economic decisions on their expectations of future policy changes. Therefore, if individuals anticipate that policy makers will implement discretionary monetary or fiscal policy in response to economic conditions, they will adjust their behavior accordingly, offsetting the intended effects of the policy. This makes policy largely ineffective, as individuals will react to the expected effects of policy changes, rather than the changes themselves. Hence, the answer is C, the reaction of the public to the expected effects of policy changes.

According to Rational Expectations Theory, Discretionary Monetary and Fiscal Policy