Assume the Fed initiates an expansionary monetary policy that is correctly anticipated by economic agents in the economy. According to the rational expectation hypothesis, the result is

Question

Quizplus · Accepted Answer

According to the rational expectation hypothesis, economic agents are able to anticipate the Fed's expansionary monetary policy, causing an immediate increase in aggregate demand and a short-run increase in the price level. However, over time, this increase in the money supply will be reflected in an equal increase in prices, leaving real output and employment unaffected in the long run. Therefore, the answer is D, an increased price level, but no change in real Gross Domestic Product (GDP) in the long run.

Assume the Fed Initiates an Expansionary Monetary Policy That Is