If Inflation Expectations Are Rational

Multiple Choice

If inflation expectations are rational,

A) the economy's reaction to a demand-side shock is the same as in the fixed-price model; that is, the output and employment levels change, not prices.
B) the economy's reaction to a demand-side shock is the same as in the flexible-price model; that is, prices adjust to keep the economy at its potential output level.
C) the economy's reaction to a demand-side shock is a combination of output and price adjustments in the short-run and eventual price adjustments in the long-run..
D) there can never be a change in output and employment.