Under the rational expectations hypothesis, if wages adjust rapidly to new information about intended policy actions, monetary policy can have an effect

Question

Quizplus · Accepted Answer

The rational expectations hypothesis implies that workers and employers incorporate new information about intended policy actions into their decision-making, leading to rapid adjustment of wages. As a result, monetary policy can only have a short-run effect if it is unanticipated, since wages will adjust quickly to the new information. In the long run, monetary policy will have no effect on real economic activity, since expected inflation and output levels will adjust to the policy actions. Therefore, choice C is the most appropriate answer.

Under the Rational Expectations Hypothesis, If Wages Adjust Rapidly to New