Rational expectations theory suggests that short-run stabilization policy
A)is best achieved with monetary policy.
B)is best achieved with fiscal policy.
C)is equally easy to achieve with monetary or fiscal policy.
D)should not be attempted.

Question

Quizplus · Accepted Answer

Rational expectations theory posits that individuals use all available information to make economic decisions, implying that they anticipate the effects of policy changes. Therefore, attempts at short-run stabilization are often ineffective as people adjust their behavior in anticipation of these policies.

Rational Expectations Theory Suggests That Short-Run Stabilization Policy