The theory of rational expectations calls for monetary policy rules because:
A) Of past policy errors
B) Policy tends to be countercyclical
C) Of the inability to time policy decisions
D) Of the reaction of the public to the expected effects of policy

Question

Quizplus · Accepted Answer

According to the theory of rational expectations, individuals form their expectations about economic variables based on all available information, including their expectations about how monetary policy will affect the economy. Therefore, if the public expects a certain monetary policy decision to have a certain effect on the economy, the central bank must take that into account when making its policy decisions. This means that monetary policy rules are necessary to guide policy decisions and manage expectations in a way that is consistent with the central bank's goals.

The Theory of Rational Expectations Calls for Monetary Policy Rules