The rational expectations argument relies on
A) wages and prices being sticky so that changes in expectations about future economic activity and the price level will prevent the short-run aggregate supply curve from shifting quickly to restore long-run equilibrium.
B) the ability of monetary policy authorities to identify and respond quickly to close output gaps and restore the economy to its long-run equilibrium.
C) wages and prices being sufficiently flexible so that the change in expectations about future economic activity and the price level will allow the short-run aggregate supply curve to shift quickly to restore long-run equilibrium.
D) wages and prices being sufficiently flexible so that changes in expectations about future economic activity and the price level will allow the aggregate demand curve to shift quickly to restore long-run equilibrium.

Question

Quizplus · Accepted Answer

The rational expectations argument relies on the assumption that wages and prices are sufficiently flexible so that changes in expectations about future economic activity and the price level will allow the short-run aggregate supply curve to shift quickly to restore long-run equilibrium. This means that if there is a shift in the aggregate demand curve due to changes in expectations, wages and prices will adjust quickly, resulting in a movement along the short-run aggregate supply curve, restoring equilibrium in the long run.

The Rational Expectations Argument Relies on