Under conditions of rational expectations of inflation,
A) the only way that government policy can affect the level of unemployment is if the policy is known in advance.
B) the only way that government policy can affect the level of unemployment is if the policy comes as a surprise.
C) the Phillips curve remains in place and unemployment will change in response to government policy changes.
D) the only way that government policy can affect the level of unemployment is if the policy is anticipated by workers, managers, savers, and investors.

Question

Quizplus · Accepted Answer

Under conditions of rational expectations, individuals form expectations about the future based on all available information, including anticipated government policies. Therefore, if a government policy is anticipated, it is already factored into individuals' decision-making, and its effects are neutralized. The only way government policy can affect the level of unemployment under these conditions is if the policy comes as a surprise, catching individuals off guard and temporarily impacting employment levels until expectations adjust.

Under Conditions of Rational Expectations of Inflation