If the rational expectation theory is accurate, equilibrium real GDP will change in the short run:
A)whenever the aggregate demand curve shifts.
B)only if discretionary fiscal policy is used.
C)only if there is a shift in aggregate demand that could not have been predicted from the information available to the public.
D)only if discretionary monetary policy is used.

Question

If the rational expectation theory is accurate, equilibrium real GDP will change in the short run:
A)​whenever the aggregate demand curve shifts.
B)​only if discretionary fiscal policy is used.
C)​only if there is a shift in aggregate demand that could not have been predicted from the information available to the public.
D)​only if discretionary monetary policy is used.

Quizplus · Accepted Answer

According to the rational expectation theory, people base their expectations of future economic conditions on all available information. Therefore, any shift in aggregate demand that could not have been predicted from the information available to the public would be the only situation in which equilibrium real GDP would change in the short run. The other options (A, B, and D) suggest changes in aggregate demand that could be anticipated by the public, so they would not cause a short-run change in equilibrium real GDP according to this theory.

If the Rational Expectation Theory Is Accurate, Equilibrium Real GDP