The model that assumes that expectations are formed rationally but does not assume complete wage and price flexibility is known as the
A)new classical model.
B)Keynesian model.
C)monetarist model.
D)new Keynesian model.

Question

Quizplus · Accepted Answer

The new Keynesian model assumes that expectations are formed rationally, but it also recognizes that wages and prices may not adjust immediately due to factors such as menu costs and labor market frictions. This model incorporates some of the insights of classical economics regarding rational expectations, but it also incorporates Keynesian ideas regarding nominal rigidities and the possibility of market failures. Therefore, the best choice is the new Keynesian model.

The Model That Assumes That Expectations Are Formed Rationally but Does