The Rational Expectations Approach Asserts That, Starting from a Long-Run

The rational expectations approach asserts that, starting from a long-run equilibrium situation, if a restrictive monetary policy is announced and implemented, the economy will

A) move rapidly to a new equilibrium without a notable recession
B) suffer a long and deep recession before reaching a new equilibrium
C) remain at the same level of inflation since government policies are always ineffective
D) move slowly to a new equilibrium since wages tend to adjust slowly
E) fail to adjust since the policy was anticipated

Correct Answer:

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