Assuming rational expectations and complete wage and price flexibility, systematic stabilization policy impacts
A) real GDP.
B) real wages.
C) the unemployment rate.
D) the inflation rate.

Question

Quizplus · Accepted Answer

Systematic stabilization policy mainly impacts the inflation rate since complete wage and price flexibility means that changes in aggregate demand will lead to changes in the price level, and not real output or the unemployment rate. With rational expectations, people will anticipate the impact of stabilization policy on inflation and adjust their behavior accordingly, neutralizing its effects on real variables.

Assuming Rational Expectations and Complete Wage and Price Flexibility, Systematic