The rational expectations hypothesis argues that a monetary policy designed to stabilize the economy will succeed only when
A)changes in the money supply are unexpected.
B)the government's budget is not in deficit.
C)labour unions have long-term contracts.
D)changes in the money supply are completely anticipated.

Question

Quizplus · Accepted Answer

The rational expectations hypothesis suggests that monetary policy will only be effective in stabilizing the economy if the changes in the money supply are unexpected. If individuals anticipate these changes, they will adjust their behavior in ways that can neutralize the policy's intended effects.

The Rational Expectations Hypothesis Argues That a Monetary Policy Designed