The theory of rational expectations concludes that
A) the public's expectations can inﬂuence the outcome of monetary policy but not of ﬁscal policy.
B) the public's expectations can inﬂuence the outcome of ﬁscal policy but not of monetary policy.
C) the public's expectations as to the effects of economic policies tends to reinforce the effectiveness of those policies.
D) by reacting in its self-interest to the expected effects of stabilization policy, the public tends to negate the impact of those policies.

Question

Quizplus · Accepted Answer

The theory of rational expectations suggests that individuals make decisions based on all available information, including their expectations of future economic conditions. When it comes to stabilization policy, such as monetary or fiscal policy, individuals will adjust their behavior in anticipation of the policy's effects, thereby limiting its impact. This means that the effectiveness of stabilization policy is limited by the public's rational expectations and their reactions to them, as stated in option D.

The Theory of Rational Expectations Concludes That