This paper examines the role of monetary policy in influencing real output and argues for the effectiveness of monetary activism, even with rational expectations. It challenges the view that real output is unaffected by monetary policy when expectations are rational, by introducing the concept of long-term contracts. The paper argues that if economic agents have long-term contracts, monetary policy can influence real output, even when the policy is preannounced and its effects are known. The paper presents two main arguments. The first, in Sections I-III, shows that long-term contracts that set nominal wages for more than one period allow monetary policy to affect real output, even when the policy is preannounced. The second, in Section IV, argues that an active and stabilizing monetary policy reduces the need for frequent renegotiation of contracts and price-setting, making such a policy desirable. The paper discusses the implications of rational expectations for monetary policy, noting that while the Phillips curve was initially seen as a stable relationship, the concept of rational expectations led to the natural rate hypothesis, which suggests that the long-run Phillips curve is vertical. The paper also explores how rational expectations affect the behavior of economic agents and the implications for monetary policy. The paper constructs a model where monetary policy can affect output if there are long-term contracts. It shows that with one-period contracts, monetary policy is irrelevant, but with longer-term contracts, monetary policy can influence output. The paper also discusses the implications of indexed contracts and the effectiveness of monetary policy in stabilizing output. The paper concludes that active monetary policy is effective in influencing output when there are long-term contracts, and that such a policy is desirable for fostering long-term contracts. It also notes that the structure of the economy adjusts as policy changes, and that monetary authorities have some room for maneuvering in shaping economic outcomes.This paper examines the role of monetary policy in influencing real output and argues for the effectiveness of monetary activism, even with rational expectations. It challenges the view that real output is unaffected by monetary policy when expectations are rational, by introducing the concept of long-term contracts. The paper argues that if economic agents have long-term contracts, monetary policy can influence real output, even when the policy is preannounced and its effects are known. The paper presents two main arguments. The first, in Sections I-III, shows that long-term contracts that set nominal wages for more than one period allow monetary policy to affect real output, even when the policy is preannounced. The second, in Section IV, argues that an active and stabilizing monetary policy reduces the need for frequent renegotiation of contracts and price-setting, making such a policy desirable. The paper discusses the implications of rational expectations for monetary policy, noting that while the Phillips curve was initially seen as a stable relationship, the concept of rational expectations led to the natural rate hypothesis, which suggests that the long-run Phillips curve is vertical. The paper also explores how rational expectations affect the behavior of economic agents and the implications for monetary policy. The paper constructs a model where monetary policy can affect output if there are long-term contracts. It shows that with one-period contracts, monetary policy is irrelevant, but with longer-term contracts, monetary policy can influence output. The paper also discusses the implications of indexed contracts and the effectiveness of monetary policy in stabilizing output. The paper concludes that active monetary policy is effective in influencing output when there are long-term contracts, and that such a policy is desirable for fostering long-term contracts. It also notes that the structure of the economy adjusts as policy changes, and that monetary authorities have some room for maneuvering in shaping economic outcomes.