Asked by Abigail Dupont on May 18, 2024
Verified
The theory of rational expectations concludes that
A) the public's expectations can influence the outcome of monetary policy,but not of fiscal policy.
B) the public's expectations can influence the outcome of fiscal policy,but not of monetary policy.
C) the public's expectations as to the effects of economic policies will tend to reinforce the effectiveness of those policies.
D) by reacting in its self-interest to the expected effects of stabilization policy,the public will tend to negate the impact of those policies.
Rational Expectations
The economic theory that individuals make decisions based on their rational outlook, available information, and past experiences.
Stabilization Policy
Economic strategies and actions taken by a government or central bank to stabilize an economy, aiming to reduce fluctuations in the business cycle.
- Understand the concept of rational expectations and its implications for economic policy effectiveness.
Verified Answer
TK
Taylor KindleMay 20, 2024
Final Answer :
D
Explanation :
The theory of rational expectations suggests that individuals will adjust their behavior based on their expectations of how government policies will affect the economy. This means that if individuals expect a particular policy to result in inflation or recession, for example, they will take steps to protect themselves from these outcomes, which can potentially offset the intended effects of the policy. Therefore, rational expectations theory suggests that policy interventions are unlikely to have a significant impact on the economy unless they manage to alter individuals' expectations in a significant way.
Learning Objectives
- Understand the concept of rational expectations and its implications for economic policy effectiveness.
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