The reason that expansionary policy cannot reduce unemployment when inflation expectations are rational is that
A) the Phillips curve shifts far enough to the right to completely offset the unemployment effect of the leftward shift of the monetary policy reaction function.
B) the monetary policy reaction function does not shift to the left if inflation expectations are rational.
C) the Phillips curve shifts far enough to the left to completely offset the unemployment effect of the . rightward shift of the monetary policy reaction function.
D) the LM curve shifts far enough to the right to offset the effect of the leftward shift of the IS curve.

Question

Quizplus · Accepted Answer

When inflation expectations are rational, people anticipate the inflationary impact of expansionary policy. This anticipation shifts the Phillips curve to the right, negating the unemployment-reducing effect of the policy by increasing inflation without reducing unemployment.

The Reason That Expansionary Policy Cannot Reduce Unemployment When Inflation