Rational Expectations Theory Asserts That Because People Have Rational Expectations

question 163

Multiple Choice

Rational expectations theory asserts that because people have rational expectations, if a policy of reducing the money supply is used:

• A) it might affect both AD and potential real GDP.
• B) consumers and firms observe that the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly.
• C) participants in economic activity react in such a way that shifts in aggregate supply will reinforce shifts in aggregate demand, and real GDP will shift inevitably into inflationary or recessionary gaps.
• D) periods of unemployment will be very short.

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