According to the theory of rational expectations, expansionary fiscal policy that is anticipated will:
A)cause wage expectations to adjust downward immediately following the lower price level.
B)increase the real wage rate in the long run.
C)cause a permanent decline in the natural rate of unemployment.
D)decrease the real wage rate in the long run.
E)cause wage expectations to adjust upward immediately following the higher price level.

Question

Quizplus · Accepted Answer

Rational expectations suggest that people will anticipate the effects of expansionary fiscal policy, leading to an immediate adjustment in wage expectations upward due to the anticipated higher price level.

According to the Theory of Rational Expectations, Expansionary Fiscal Policy