According to the rational-expectation theory, an unanticipated increase in money supply increases both output and prices.

Question

Quizplus · Accepted Answer

According to the rational-expectation theory, individuals are able to accurately predict changes in the economy based on past behavior and available information. Therefore, an unanticipated increase in money supply is expected to increase both output and prices as individuals adjust their expectations accordingly.

According to the Rational-Expectation Theory, an Unanticipated Increase in Money