Question

What are the implications of the rational expectations hypothesis for the conduct of economic policy?

Answer 1

Its actually terrible for economic policies. What it says is that rational people will react immediately to announced changes in economic policy. So for example if the gov decides to grow the economy by increasing gov spending, rational people will realize that this will necessitate future tax increases, and thus they will increase their savings NOW to meet those future tax obligations. This response completely offsets any economic growth as a result of teh economic policy.

In short: it makes economic policy much less effective.