Under adaptive expectations, a shift to a more expansionary macroeconomic policy will
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A. B. C. D.C
The effects of a more expansionary macroeconomic policy under adaptive expectations are to reduce unemployment only in the short run. This is because the inflationary effects of the demand-stimulus policy will be underestimated and thus the real wage would be eroded. The consequence of this erosion is an increase in employment. However, in the long run, unemployment is unchanged since the higher rate of inflation is anticipated.