When expectations are rational and there are institutional rigidities, disequilibrium exists only temporarily as a result of random unpredictable shocks.

Question

Quizplus · Accepted Answer

Rational expectations suggest that individuals use all available information efficiently to forecast future economic variables, and institutional rigidities (such as wage and price stickiness) can slow down adjustments to shocks. However, the presence of rational expectations means that the economy will adjust to these shocks, albeit more slowly due to the rigidities, and thus any disequilibrium is temporary rather than permanent.

When Expectations Are Rational and There Are Institutional Rigidities, Disequilibrium