In the rational expectations view, the best approach to ﬁscal policy is for the government to
A) cut taxes.
B) balance its budget.
C) eliminate transfer payments.
D) ﬁx government spending.

Question

Quizplus · Accepted Answer

In the rational expectations view, individuals have perfect information and can accurately predict future economic outcomes. Therefore, any attempt by the government to stimulate the economy through fiscal policy (such as increasing government spending or cutting taxes) is likely to be offset by changes in individual behavior, rendering the policy ineffective. The only viable approach to fiscal policy in this view is for the government to balance its budget in order to maintain economic stability and avoid any distortionary effects on individual behavior.

In the Rational Expectations View, the Best Approach to ﬁScal