Question

Suppose that economists were able to use U.S. economic data to demonstrate that the rational expectations hypothesis is true. Would this be sufficient to demonstrate the validity of the policy irrelevance proposition?

Short answer

As a result,In short term, the prediction's influence may be negligible. employees may seek greater salaries in order to keep their real earnings from dropping, claiming that nominal wages have increased owing to price level fluctuations.

Step-by-step solution

Step: 1 Introduction:

It is a hypothesis that claims that individuals integrate the impacts of earlier policy changes on crucial economic variables with the projected consequences of existing policy changes based on their own assessment. Before we continue, let's review what the policy irrelevance proposition is all about! In reality, the policy irrelevance argument asserts that policy acts that are expected have no practical effects in the near run.

Step: 2 Rational expectations:

Let us now investigate how far the rational expectations theory can prove the truth of the policy irrelevance argument.The reasonable expectations hypothesis will very certainly fail to support the policy irrelevance argument.The policy irrelevance statement refers to the fact that a hypothesis based on reasonable expectations does not always hold true. In the short term, the prediction's influence may be negligible.

Step: 3 Policy irrelevance proposition:

Furthermore, such forecasts may result in a little adjustment in the pricing of other production components as well as salaries.As a result, employees may seek greater salaries in order to keep their real earnings from dropping, claiming that nominal wages have increased owing to price level fluctuations.