The Inability of the Government to Stabilize the Economy in the 1970s

Multiple Choice

The inability of the government to stabilize the economy in the 1970s when real GDP has fallen, but inflation has remained high, led Robert Lucas to challenge the Keynesian macroeconomic policy prescriptions. Which of the following is the main tenet of his argument?

A) Active stabilization policies tend to be destabilizing because of the long policy lags and consequently, slow down the economy's self correction.
B) There is no role for active stabilization policies because they do not take into account rational choices by individuals; failure to do so generally cancels the impact of fiscal and monetary policies.
C) Individuals respond in predictable ways to their changing economic environment; active stabilization interferes with people's ability to respond to changing economic conditions.
D) The economy is inherently stable and any role for stabilization policy should be limited to those that affect long-run aggregate supply to promote economic growth and not aggregate demand.