If firms have rational expectations and if they set prices and wages on this basis, then on average
A) prices and wages will be set at levels that do not clear the goods and labor markets.
B) prices will be set at levels that ensure equilibrium in the goods market, but wages will be set at levels that do not clear the labor market.
C) prices and wages will be set at levels that ensure equilibrium in the goods and labor markets.
D) wages will be set at levels that ensure equilibrium in the labor market, but prices will be set at levels that do not clear the goods market.

Question

Quizplus · Accepted Answer

If firms have rational expectations and set prices and wages accordingly, they will aim to achieve equilibrium in both the goods and labor markets. This means that they will set prices at levels that ensure that the quantity of goods demanded by consumers equals the quantity supplied by producers, and they will set wages at levels that ensure that the quantity of labor demanded by firms equals the quantity supplied by workers. Therefore, option C is the correct answer.

If Firms Have Rational Expectations and If They Set Prices