According to Lucas and Sargent, workers and firms have rational expectations, and therefore if the Fed...
According to Lucas and Sargent, workers and firms have rational expectations, and therefore if the Fed pursues
a contractionary monetary policy:
A. agents will cause an increase in the natural rate of unemployment.
B. agents will immediately adjust their expectations of inflation down.
C. agents will not change their expectations.
D. agents will cause an decrease in the natural rate of unemployment.
Homework Answers
Correct option is (B).
A contractionary monetary policy decreases real GDP and price level, so agents with rational expectations will adjust their inflation expectations downward.
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