Statement I: According to the rational expectations theory,the prime economic mover is aggregate demand,not aggregate supply.
Statement II: The rational expectationists believed that the oil price shocks of 1973 and 1979 created declines in aggregate supply,lowering the natural level of GDP.

Question

Quizplus · Accepted Answer

Statement I is false because according to the rational expectations theory, both aggregate demand and aggregate supply are important in determining the natural level of GDP. However, statement II is true because rational expectations theorists did argue that the oil price shocks led to a decline in aggregate supply, which in turn lowered the natural level of GDP.

Statement I: According to the Rational Expectations Theory,the Prime Economic