According to rational expectations theory, discretionary monetary and ﬁscal policy will be ineffective primarily because of the
A) successes of macroeconomic policymakers
B) inability of policymakers to time decisions properly.
C) reaction of the public to the expected effects of policy changes.
D) slow impact of policy to stimulate changes in real output and employment.

Question

Quizplus · Accepted Answer

Rational expectations theory assumes that individuals in the economy form expectations of future economic conditions based on all available information, including their understanding of government policies. Therefore, if policymakers announce a discretionary monetary or fiscal policy, individuals will adjust their expectations accordingly, negating any potential impact of the policy. This is known as the "policy ineffectiveness proposition." As a result, discretionary policy will be ineffective primarily because of the reaction of the public to the expected effects of policy changes.

According to Rational Expectations Theory, Discretionary Monetary and ﬁScal Policy