Rational expectations theory considers the aggregate
A) demand curve to be vertical.
B) supply curve to be vertical.
C) supply curve to be horizontal.
D) demand curve to be horizontal.

Question

Quizplus · Accepted Answer

Rational expectations theory, particularly in its application to macroeconomics, suggests that individuals form expectations about the future based on all available information, including the understanding of economic policies and their effects. This theory implies that in the long run, the aggregate supply curve is vertical because it assumes that the economy's output is determined by factors such as technology and resources, not by the price level. This means that in the long run, the economy is at its full employment level of output, and changes in the aggregate demand only affect prices, not output.

Rational Expectations Theory Considers the Aggregate