Which of the Following Is an Important Implication of the Rational

question 31

Multiple Choice

Which of the following is an important implication of the rational expectations argument?

• A) Since people form their expectations using all available information, the use of monetary policies to eliminate output gaps will lead to inflation.
• B) Since any consistent set of monetary policies will be learned and anticipated by a population with rational expectations, policies designed to influence the economy to a level of production other than the potential real GDP will be ineffective.
• C) Although people may revise their expectations about the price level and future economic activity, they cannot act on these changes because in reality, wages and prices are sticky. Thus, policy intervention is necessary.
• D) Policymakers must constantly monitor economic activity and revise their economic policy goals to keep up with changing expectations of a population with rational expectations.

---

Definitions:

Internal Validity

pertains to the extent to which a study or experiment accurately establishes a causal relationship between variables, minimizing the influence of external factors.

Systematic Changes

Alterations that follow a consistent, predictable pattern and are often due to specific causes or interventions.

Time

The indefinite continued progress of existence and events in the past, present, and future regarded as a whole.

History Effects

Events that occur outside the experiment which may affect participants' responses within the experiment.