According to the rational expectation view, does the government have the ability to control the level of real output and unemployment?
A)Only in the SR and only if it makes unexpected changes in aggregate demand.
B)Only in the SR and only if it announces plans well in advance, so that expectations are affected.
C)Only in the LR and only if it shifts AS instead of AD.
D)Only in the LR and only if it uses monetary policy instead of fiscal policy.

Question

According to the rational expectation view, does the government have the ability to control the level of real output and unemployment?
A)​Only in the SR and only if it makes unexpected changes in aggregate demand.
B)​Only in the SR and only if it announces plans well in advance, so that expectations are affected.
C)​Only in the LR and only if it shifts AS instead of AD.
D)​Only in the LR and only if it uses monetary policy instead of fiscal policy.

Quizplus · Accepted Answer

According to the rational expectation view, individuals have rational expectations about future economic conditions, and they use this information to make decisions about their consumption and production decisions. Therefore, if the government announces its plans to increase aggregate demand, individuals will expect the increase and adjust their behavior accordingly, negating the intended effect. However, if the government makes unexpected changes in aggregate demand, it may be able to control the level of real output and unemployment in the short run. In the long run, the economy adjusts to its potential output regardless of the level of aggregate demand, so the government cannot control real output and unemployment in the long run.

According to the Rational Expectation View, Does the Government Have