On a graph with the inflation and unemployment rates as the axes, if an expansionary fiscal policy results in no decrease in unemployment,
A) inflation expectations must be static.
B) inflation expectations must be adaptive.
C) inflation expectations must be dynamic.
D) inflation expectations must be rational.

Question

Quizplus · Accepted Answer

Rational expectations imply that people use all available information to forecast future economic variables, including the effects of fiscal policy, which can lead to no decrease in unemployment if they anticipate the policy's impact on inflation.

On a Graph with the Inflation and Unemployment Rates as the Axes