According to rational expectations theory, instantaneous market adjustments make:
A) Expansionary economic policy more effective in increasing output
B) Expansionary economic policy ineffective in increasing output
C) Economic policy more rational and more stable
D) Economic policy less rational and less stable

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals make future economic decisions based on their expectations of how policies and events will affect the economy. Therefore, if the market has already anticipated an expansionary policy, it will not have any impact on output as it is already factored in by the market. Thus, expansionary economic policy becomes ineffective in increasing output.

According to Rational Expectations Theory, Instantaneous Market Adjustments Make