The Theory of Rational Expectations Contends That Policy Activism Is

question 121

Multiple Choice

The theory of rational expectations contends that policy activism is:

• A) not warranted, because we don't know enough about the workings of the economy to stabilize it.
• B) not warranted; the public defeats discretionary policies because everyone expects them and therefore their effectiveness is thwarted.
• C) warranted because discretionary policies have a strong effect on real output.
• D) warranted because expectations are rational only in the short run.

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