If the public has rational expectations, an attempt to increase aggregate demand to stimulate the economy will:
A)be less inflationary in the short run than if the public alters their expectations slowly in response to changes in government policy.
B)be more effective if the public alters their expectations quickly in response to changes in government policy.
C)be ineffective if the shift in aggregate demand is predictable.
D)all of the above.

Question

If the public has rational expectations, an attempt to increase aggregate demand to stimulate the economy will:
A)​be less inflationary in the short run than if the public alters their expectations slowly in response to changes in government policy.
B)​be more effective if the public alters their expectations quickly in response to changes in government policy.
C)​be ineffective if the shift in aggregate demand is predictable.
D)​all of the above.

Quizplus · Accepted Answer

When the public has rational expectations, they anticipate government actions and adjust their behavior accordingly. If a shift in aggregate demand is predictable, people will adjust their expectations and actions in advance, making the policy ineffective in stimulating the economy.

If the Public Has Rational Expectations, an Attempt to Increase