According to rational expectations theory, the cause of observed instability in the private economy would most likely be due to:
A) Changes in aggregate supply
B) Inappropriate monetary policy
C) The instability of investment spending in the economy
D) Unanticipated aggregate demand and aggregate supply shocks in the short run

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals and firms base their expectations about future economic conditions on all available information. Therefore, in the short run, the private economy may experience instability due to unanticipated shocks to aggregate demand or supply. These shocks could cause fluctuations in output, employment, and prices. Inappropriate monetary policy could also contribute to instability, but this is not the primary focus of rational expectations theory. The instability of investment spending may be a factor in some cases, but it does not explain all observed instability in the private economy. Changes in aggregate supply may have an impact on economic growth and inflation, but they are not typically considered to be the primary source of short-run instability.

According to Rational Expectations Theory, the Cause of Observed Instability