One implication of coupling the rational expectations hypothesis with the assumption of flexible wages and prices is that
A) expansionary monetary policy will be effective in combating recessions.
B) contractionary monetary policy will be effective in combating inflation.
C) only predictable policy actions by the Fed will have an effect on the real economy.
D) only unpredictable policy actions by the Fed will have an effect on the real economy.

Question

Quizplus · Accepted Answer

Under rational expectations and flexible wages/prices, individuals anticipate policy actions, so only unexpected (unpredictable) actions can affect the real economy.

One Implication of Coupling the Rational Expectations Hypothesis with the Assumption