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 is based on the belief that individuals make decisions based on rational calculations of future events, using all available information. This assumption includes the flexibility of prices both upward and downward, as well as the rationality of human behavior. This choice reflects the core principles of the rational expectations theory. Option B is incorrect because it describes efficiency wage theory, not rational expectations theory. Option C is incorrect because it describes market failure, which is outside the scope of rational expectations theory. Option D is incorrect because it describes monopolistic competition, not rational expectations theory.

Rational Expectations Theory Assumes That