If all economic agents have rational expectations,
A)wages and prices must be perfectly flexible
B)imperfect competition will not lead to an undesirable outcome
C)involuntary unemployment cannot exist
D)some small menu cost of changing prices may still exist, preventing markets from clearing rapidly
E)none of the above

Question

Quizplus · Accepted Answer

Even if all economic agents have rational expectations, there may still be a small menu cost of changing prices, which can prevent markets from clearing rapidly. This suggests that option D is the correct answer. Options A, B, and C are incorrect, as rational expectations alone do not imply perfect wage and price flexibility, the absence of undesirable outcomes from imperfect competition, or the absence of involuntary unemployment.

If All Economic Agents Have Rational Expectations