According to the theory of rational expectations,the "fooling" of workers in Friedman's model
A)is rational,since sudden unforeseeable changes in aggregate demand can and do occur.
B)is rational,since workers are always on their labor supply curve.
C)is not rational,since workers should learn to immediately link unexpected wage changes to wrongly-forecast price levels.
D)is not rational,since workers are often thrown off of their labor supply curve.

Question

Quizplus · Accepted Answer

According to the theory of rational expectations, individuals base their decisions on all available information, including past experiences and current market conditions. Therefore, it is not rational for workers to be continually fooled by unexpected changes in wages and wrongly-forecast price levels. Workers should be able to adjust their behavior in response to changes in market conditions and correctly anticipate the effects of inflation on their wages. Thus, the correct choice is (C) - workers should learn to immediately link unexpected wage changes to wrongly-forecast price levels.

According to the Theory of Rational Expectations,the "Fooling" of Workers