If people form expectations in accordance with the rational expectations hypothesis and they correctly anticipate policy actions, then the policies will:
A) not impact output in either the short run or the long run.
B) impact output in both the short run and the long run.
C) impact output in the short run but have no effect in the long run.
D) impact output in the long run but have no effect in the short run.

Question

Quizplus · Accepted Answer

Under the rational expectations hypothesis, individuals use all available information to make forecasts about future policy actions. If they correctly anticipate policy actions, these actions are already incorporated into their decision-making, leading to no impact on output in either the short run or the long run, as adjustments are made in advance.

If People Form Expectations in Accordance with the Rational Expectations