Explore BrainMass

Money & Growth

Evaluate the statement: "In an important sense the term policy irrelevance proposition is misleading because if the rational expectations hypothesis is valid, economic policy actions can have significant effects on real GDP & the unemployment rate"

correct or incorrect statement?

Solution Preview

This statement is untrue, but not because policy actions don't have an effect. They often do. It is untrue because it is based on a flawed understanding of rational expectations. The statement implies that people who are rational will respond to economic policy actions predictably, enabling them to work. ...

Solution Summary

Policy irrelevance and the rational expectations hypothesis