The primary reason why the Central Bank cannot systematically surprise the public with its monetary policy is
A)the nonneutrality of money.
B)the presence of productivity shocks that generate real business cycles independently of the monetary side of the economy.
C)the presence of rational expectations among the public.
D)the presence of propagation mechanisms within the economy.

Question

Quizplus · Accepted Answer

Rational expectations refer to the idea that individuals form expectations about future economic variables based on all available information, including their past experiences and economic theory. This means that if the Central Bank tries to surprise the public with its monetary policy, the public is likely to anticipate the surprise and incorporate it into their expectations. This reduces the effectiveness of the surprise, making it difficult for the Central Bank to achieve its policy objectives. Therefore, the presence of rational expectations among the public is the primary reason why the Central Bank cannot systematically surprise the public with its monetary policy.

The Primary Reason Why the Central Bank Cannot Systematically Surprise