the rational expectations theory indicates that expansionary policy will

He used the term to describe the many economic situations in which the outcome depends partly upon what people expect to happen. If the Federal Reserve attempts to lower unemployment through expansionary monetary policy economic agents will anticipate the effects of the change of policy and raise their expectations of future inflation accordingly. The rational expectations theory indicates that expansionary policy will: a-stimulate real output in the long run but not in the short run. b. reduce inflation. He used the term to describe the many economic situations in which the outcome depends partly on what people expect to happen. Once people realize what has happened . 97. D. fiscal policy works only to the extent that it is accompanied by fully anticipated changes in the money supply. Proponents of rational expectations postulate that debtfinanced expansionary fiscal policy has no role in stimulating demand because agents expect future increases in taxation and adjust their spending accordingly (under the Ricardian equivalence hypothesis). The theory of rational expectations: A. assumes that consumers and businesses anticipate rising prices when the government pursues an expansionary fiscal policy. The new classical macroeconomic model draws the efficacy of EMP or expansionary fiscal policy (EFP) into serious doubt because if market participants anticipate it, the AS curve will … It is given that the economy is at an initial equilibrium at point A. 3. b. expand real output and employment if the public quickly anticipates the effects of the expansionary policy. It should be noted that such deviations from rational expectations were already considered in the first (seminal) article on rational expectations by Muth . Q 133 Mainstream economists have adopted some ideas from RET and some rational expectations assumptions are being incorporated into current macroeconomic models. According to the theory of rational expectations, individuals will respond to expansionary monetary policy by: A. Rational expectations models have altered the way economists view the role of economic policY. Rational expectations theory, the theory of rational expectations (TRE), or the rational expectations hypothesis, is a theory about economic behavior. there will be a movement down along the Phillips curve, causing unemployment to return to its original level. According to rational expectations theory, people (i.e., workers, businessmen, consumers, lenders) will correctly anticipate that this expansionary policy will cause inflation in the economy and they would take prompt measures to protect themselves against this inflation. b-fail to increase employment because individuals will anticipate it and take actions that will offset its impact. The rational expectations theory is a concept and theory used in macroeconomics. In the short run, unexpected increases in aggregate demand cause the price level to _____ and the unemployment rate to _____. It states that on average, we can quite accurately predict future conditions and take appropriate measures. The natural rate hypothesis, which we learned about in an earlier section, argues that while there may be a tradeoff between inflation and unemployment in the short run, there is no tradeoff in the long run. Rational expectations theory allows for temporary changes in output due to expansionary policy, whereas adaptive expectations theory holds that no such changes in output could occur. In all other respect, they are not different from sophisticated voters. b-fail to increase employment because individuals will anticipate it and take actions that will offset its impact. C)equalize real and nominal interest rates during lengthy periods of inflation. Unsophisticated voters may (or may not) be able to respond to the current government policy, but certainly not in a (fully) rational way. According to rational expectations, decision makers quickly anticipate the inflationary effects of expansionary policies. The rational expectations perspective suggests that: A. fiscal policy is more powerful than monetary policy. 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