If expectations are adaptive,then what is the long-run danger of an activist monetary policy?
A) high inflation and high unemployment
B) stagnant real gross domestic product (GDP)and high inflation
C) underestimated inflation and high unemployment
D) low real gross domestic product (GDP)growth and low unemployment
E) sticky prices and high unemployment

Question

Quizplus · Accepted Answer

If expectations are adaptive, then an activist monetary policy can lead to high inflation in the long run. This is because people will come to expect that the central bank will always inflate the economy, and they will adjust their behavior accordingly. For example, workers will demand higher wages to compensate for expected inflation, and businesses will raise prices to protect their profit margins. This can lead to a vicious cycle of inflation, as higher prices lead to higher wages, which in turn lead to higher prices.

If Expectations Are Adaptive,then What Is the Long-Run Danger of an Activist