The rational expectations hypothesis implies that discretionary macropolicy may be
A) relatively effective in both the short run and long run.
B) relatively effective in the short run but ineffective in the long run.
C) relatively ineffective both in the short run and long run.
D) effective in the long run since decision makers will continually make predictable, systematic errors.

Question

Quizplus · Accepted Answer

The rational expectations hypothesis implies that individuals make use of all available information to form expectations about future events, including government policies. As a result, the impact of discretionary macroeconomic policies on real economic outcomes is likely to be limited. This means that monetary or fiscal policy may be relatively ineffective both in the short run and in the long run.

The Rational Expectations Hypothesis Implies That Discretionary Macropolicy May Be