Multiple Choice
Rational expectations theory asserts that because people have rational expectations, if a policy of reducing the money supply is used:
A) it might affect both AD and potential real GDP.
B) consumers and firms observe that the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly.
C) participants in economic activity react in such a way that shifts in aggregate supply will reinforce shifts in aggregate demand, and real GDP will shift inevitably into inflationary or recessionary gaps.
D) periods of unemployment will be very short.
Correct Answer:

Verified
Correct Answer:
Verified
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