Expectations
A) have no effect on monetary policy.
B) have no effect on consumers' spending habits.
C) play a role in fiscal policy but not in monetary policy.
D) can dampen the effects of monetary policy.
E) are easily studied in economics.

Question

Quizplus · Accepted Answer

Expectations can impact the effectiveness of monetary policy. For example, if consumers and businesses expect inflation to rise in the future, they may increase their spending now, which can counteract the effects of a contractionary monetary policy designed to reduce inflation. Similarly, if investors expect interest rates to remain low for a long period, this can lead to bubbles in asset prices, as investors borrow money to invest in assets that yield returns greater than the cost of the borrowed funds. In both cases, expectations can dampen the effects of monetary policy.