For the policy irrelevance theorem to hold,people must
A)know the future perfectly.
B)not persistently make the same mistakes in forecasting the future.
C)know exactly what the Bank of Canada is planning to do.
D)never make mistakes in their forecasts even when they do not know the future perfectly.

Question

Quizplus · Accepted Answer

The policy irrelevance theorem states that in efficient markets, changes in monetary policy will not affect real economic variables such as output or employment. This assumes that people do not persistently make the same mistakes in forecasting the future, as markets incorporate all available information and expectations about the future. The other choices are not necessary for the theorem to hold. Knowing the future perfectly or knowing the Bank of Canada's plans would make monetary policy effective, while never making mistakes in forecasts is unrealistic.

For the Policy Irrelevance Theorem to Hold,people Must