A conclusion of the theory of rational expectations is that, in the short run, the impact of discretionary fiscal policies designed to shift the AD curve will:
A)result in no net change in AD once people's expectations adjustments have been accounted for.
B)shift AD in the opposite direction intended once people's expectations adjustments have been accounted for.
C)be anticipated and compensated for, causing no significant effect on real GDP or employment if people's anticipations are correct.
D)have to be anticipated to change real output in the intended direction.

Question

A conclusion of the theory of rational expectations is that, in the short run, the impact of discretionary fiscal policies designed to shift the AD curve will:
A)​result in no net change in AD once people's expectations adjustments have been accounted for.
B)​shift AD in the opposite direction intended once people's expectations adjustments have been accounted for.
C)​be anticipated and compensated for, causing no significant effect on real GDP or employment if people's anticipations are correct.
D)​have to be anticipated to change real output in the intended direction.

Quizplus · Accepted Answer

According to the theory of rational expectations, people will anticipate and adjust their behavior in response to any discretionary fiscal policies designed to shift the AD curve. As a result, once people's anticipations are correct, the impact of such policies will be nullified or diminished, causing no significant effect on real GDP or employment. Therefore, choice C is the best answer.

A Conclusion of the Theory of Rational Expectations Is That