Economists of the rational expectations school:

A) have no confidence in the ability of workers and firms to observe and react to economic events.
B) believe workers and firms behave the same regardless of what the Fed does.
C) have great faith in the ability of monetary policy makers to maintain a full employment economy with stable prices.
D) believe that effective monetary policy can shift the potential level of output to the right.
E) believe workers and firms make decisions based on what they think monetary policy will be in the future.

Rational Expectations School

An economic idea that assumes individuals make predictions about the future based on all available information and past experiences in a rational manner.

Monetary Policy

The process by which a central bank controls the supply of money in an economy, typically targeting inflation, employment, and economic growth.

Potential Level

The potential level of output, or potential GDP, is the maximum amount of goods and services an economy can produce when it is fully utilizing its resources, without causing inflation to rise.