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Now, suppose that the public fully anticipates the Fed's decision to decrease the money supply. Assume the public also believes that the Fed is firmly
Now, suppose that the public fully anticipates the Fed's decision to decrease the money supply. Assume the public also believes that the Fed is firmly committed to carrying out this policy. According to rational expectations theory, when the economy is in long-run equilibrium, a fully anticipated decrease in the money supply will cause the economy to move [from A to B and then to C; from A to B and then back to A; directly from A to C; from A to B to C and then back to B; from A to B permanently] on the previous Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have the immediate effect of [a decrease; no change; an increase] in the inflation rate and [a decrease; no change; an increase] in the unemployment rate
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