Question

According to the rational expectations model, the attempt by the government to reduce unemployment below its natural rate through expansionary policies will succeed in the short run and can succeed in the long run as long as the government makes it clear what its goals are. succeed because the government knows how people will react to their policies and will adjust their policies accordingly 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. fail because the economy can never achieve an unemployment rate below the natural level.

Answer 1

according to the rational expectation hypothesis people always make use of all the nformation available to them and learn from the past trends while taking future decissions. according to this theory in the short run government policies aimed to reduce unemployment will have no impact on the unemployment level because people will clearly predict the effect of policy change. this will make the philips curve inelastic. so the unemployment will not go below the natural level in the presence of rational expectation hypothesis.