If firms have rational expectations and if they set prices and wages on this basis, then prices and wages:
A) will always be above market- clearing levels.
B) will always be at market- clearing levels.
C) will, on average, be set at market- clearing levels.
D) will never be set at market- clearing levels.

Question

Quizplus · Accepted Answer

Firms with rational expectations will set prices and wages based on their expectation of market-clearing levels. However, their expectations may not always be correct, leading to occasional deviations from market-clearing levels. Therefore, prices and wages will, on average, be set at market-clearing levels.

If Firms Have Rational Expectations and If They Set Prices