Proponents of rational expectations argued that the sacrifice ratio
A)could be high because it was rational for people not to immediately change their expectations.
B)could be high because people might adjust their expectations quickly if they found anti-inflation policy credible.
C)could be low because it was rational for people not to immediately change their expectations.
D)could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.

Question

Quizplus · Accepted Answer

Proponents of rational expectations believe that if people find an anti-inflation policy credible, they will quickly adjust their expectations about future inflation. This rapid adjustment means that the economy can reduce inflation with a lower cost in terms of unemployment or lost output, leading to a lower sacrifice ratio.

Proponents of Rational Expectations Argued That the Sacrifice Ratio