If expectations are rational, the credibility of an anti-inflation announcement reduces the resulting fall in employment.

Question

Quizplus · Accepted Answer

Rational expectations suggest that if people believe an anti-inflation policy is credible, they will adjust their inflation expectations downward. This reduces the need for actual inflation to fall significantly to meet the new expectations, thereby lessening the potential negative impact on employment typically associated with disinflation efforts.

If Expectations Are Rational, the Credibility of an Anti-Inflation Announcement