Most economists reject the theory of rational expectations because
A)expectations adjust very quickly.
B)workers receive wage increases in advance of inflation.
C)the short-run aggregate supply curve is vertical.
D)labor contracts tend to embody past inflation rates.

Question

Quizplus · Accepted Answer

Labor contracts tend to embody past inflation rates, which implies that workers base their wage demands on past inflation rather than on rational expectations of future inflation. This contradicts the premise of rational expectations theory that individuals make decisions based on all available information, including expectations of future events.

Most Economists Reject the Theory of Rational Expectations Because