Which statement(s) is/are TRUE regarding the rational expectations theory? I. In general, studies support the policy ineffectiveness proposition.
II) Labor markets often exhibit short-term wage stickiness.
III) It does not make the best use of all publicly available information.

Question

Quizplus · Accepted Answer

The rational expectations theory acknowledges that people may not always have perfect information, but it assumes that they make the best use of the information they do have, and therefore, the theory makes the best use of all publicly available information. However, labor markets often exhibit short-term wage stickiness, which means that wages may not adjust immediately to changes in the economy, creating some deviations from the rational expectations theory. The policy ineffectiveness proposition suggests that changes in monetary policy do not have a lasting impact on the economy, and while this proposition is often supported by studies, it is not a direct implication of the rational expectations theory. Therefore, statement II is the only true statement regarding the rational expectations theory.

Which Statement(s) Is/are TRUE Regarding the Rational Expectations Theory? I