Studying alternative theories of how people form expectations is particularly relevant to monetary policy because:
A) if people fully expect inflation to occur, the effects of monetary policy are more widespread.
B) monetary policy can only have real effects on the economy if people fully expect inflation.
C) unexpected inflation cause prices to be flexible.
D) the effects of expected inflation are completely different from the effects of unexpected inflation.
E) expected inflation cause prices to become sticky.

Question

Quizplus · Accepted Answer

The effects of expected inflation differ from unexpected inflation because expected inflation is often incorporated into contracts and pricing, while unexpected inflation can lead to unanticipated changes in purchasing power and economic behavior. Understanding these differences is crucial for effective monetary policy.

Studying Alternative Theories of How People Form Expectations Is Particularly