According to rational expectations theory:
A)a large reduction in unemployment can be achieved with a relatively small increase in inflation.
B)people are not easily fooled by changes in government fiscal policy.
C)inflation rates that rise 3 percentage points each year will keep unemployment below its natural rate for a sustained period of time.
D)the Phillips curve will slope downward to the right, if people correctly anticipate the inflation rate.

Question

According to rational expectations theory:
A)​a large reduction in unemployment can be achieved with a relatively small increase in inflation.
B)​people are not easily fooled by changes in government fiscal policy.
C)​inflation rates that rise 3 percentage points each year will keep unemployment below its natural rate for a sustained period of time.
D)​the Phillips curve will slope downward to the right, if people correctly anticipate the inflation rate.

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals use all available information to make forecasts and therefore cannot be systematically fooled by policy changes, including fiscal policy. This implies that people adjust their behavior in anticipation of policy effects, limiting the ability of such policies to manipulate economic outcomes like employment and inflation in the long term.

According to Rational Expectations Theory