Which statement is TRUE when rational expectations exist and there is a change in monetary policy which is unexpected?
A) The change in monetary policy leads to a change in aggregate demand that leads to a temporary short-run equilibrium that is different from the long-run equilibrium.
B) The change in monetary policy leads to a simultaneous shift of the short-run aggregate supply curve.
C) The change in monetary policy lead to a simultaneous shift in the long-run aggregate supply curve.
D) The change in monetary policy does not change equilibrium in either the short-run or long-run.

Question

Quizplus · Accepted Answer

Under rational expectations, an unexpected change in monetary policy can still affect aggregate demand, leading to a temporary short-run equilibrium that differs from the long-run equilibrium. This is because individuals and firms adjust their expectations and behaviors based on new information, affecting economic variables like output and prices in the short run before the economy adjusts back to its long-run path.

Which Statement Is TRUE When Rational Expectations Exist and There