Rational expectations theory allows for temporary changes in output due to expansionary policy,
whereas adaptive expectations theory holds that no such changes in output could occur.

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals form their expectations about the future based on all available information, including the anticipated effects of policy changes, which can lead to changes in output. Adaptive expectations theory, on the other hand, is based on past experiences and might not immediately account for policy changes, but it does not hold that changes in output could never occur due to expansionary policy.

Rational Expectations Theory Allows for Temporary Changes in Output Due