Rational expectations theory assumes that
A) people behave rationally and that all product and resource prices are ﬂexible both upward and downward.
B) ﬁrms pay above-market wages to elicit work effort.
C) markets fail to coordinate the actions of households and businesses.
D) markets are dominated by monopolistic ﬁrms.

Question

Quizplus · Accepted Answer

Rational expectations theory assumes that people behave rationally and adjust their expectations based on all available information, including past events, current economic conditions, and future trends. It also assumes that markets are efficient and that all product and resource prices are flexible both upward and downward. Therefore, option A is the best choice. Option B is incorrect because the theory does not assume that firms pay above-market wages to elicit work effort. Option C is incorrect because the theory assumes that markets are efficient and can coordinate the actions of households and businesses. Option D is incorrect because the theory assumes that markets are competitive, not dominated by monopolistic firms.

Rational Expectations Theory Assumes That