According to the Rational Expectations Hypothesis, the Attempt by the Government

question 62

Multiple Choice

According to the rational expectations hypothesis, the attempt by the government to reduce unemployment below its natural rate through expansionary policies will

• A) succeed in the short run and can succeed in the long run as long as the government makes it clear what its goals are.
• B) succeed because the government knows how people will react to their policies and will adjust their policies accordingly.
• C) fail because people will figure out what the government is doing and alter their expectations and their behavior in ways that counteract the government policy.
• D) fail because the economy can never achieve an unemployment rate below the natural level.

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Definitions:

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