Rational expectations theory suggests that changes in people's expectations in response to
changes in ﬁscal and monetary policy changes will make such policy changes ineffective.

Question

Quizplus · Accepted Answer

Rational expectations theory posits that people make predictions about future economic conditions based on all available information, including past experiences and government policy. Therefore, if government implements a new policy, individuals will adjust their expectations and behavior accordingly, resulting in potential economic outcomes that may not match the intended effects of the policy. This suggests that fiscal and monetary policy changes might be less effective than expected because economic agents adjust their expectations quickly.

Rational Expectations Theory Suggests That Changes in People's Expectations in Response