Under the adaptive expectations hypothesis, how will a shift to a more expansionary monetary policy affect the economy?
A) In the short run, the real rate of output will be unaffected, but in the long run, it will increase.
B) In the short run, the real rate of output will increase, but in the long run, it will be unchanged.
C) There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher.
D) In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase.

Question

Quizplus · Accepted Answer

Under adaptive expectations, people adjust their expectations based on past experiences. In the short run, expansionary monetary policy can increase output as people are slow to adjust their expectations about inflation. However, in the long run, as expectations adjust, output returns to its natural level, leaving it unchanged.

Under the Adaptive Expectations Hypothesis, How Will a Shift to a More