The theory that people will expect fiscal and monetary policies to have certain effects and that they will take actions that make these policies ineffective is the

A) accelerating inflation theory.
B) adaptive expectations theory.
C) rational expectations theory.
D) quantity theory of money.
E) None of the choices/statements are true.

Rational Expectations Theory

This is based on three assumptions: (1) that individuals and business firms learn through experience to anticipate the consequences of changes in monetary and fiscal policy; (2) that they act immediately to protect their economic interests; and (3) that all resource and product markets are purely competitive.

Adaptive Expectations Theory

An economic theory that assumes individuals form their expectations about the future based on past experiences and gradually adjust as reality unfolds.

Accelerating Inflation Theory

A theory suggesting that inflation will speed up as demand grows and outpaces supply, leading to a continuous increase in price levels.