Those who believe in the rational expectations hypothesis advocate
A) active fiscal policy during recessions.
B) active monetary policy during recessions.
C) active monetary policy during inflationary periods only.
D) no policy intervention.

Question

Quizplus · Accepted Answer

Those who believe in the rational expectations hypothesis argue that economic agents have perfect information and use it to form expectations that are consistent with the economic model. Therefore, any attempt to deviate from this rational expectations equilibrium will be useless, as agents will adjust their behavior accordingly. As a consequence, there is no need for policy intervention, as any attempt to manipulate economic outcomes will be anticipated and offset by agents' decisions.

Those Who Believe in the Rational Expectations Hypothesis Advocate