If firms have rational expectations and if they set prices and wages on this basis, then prices and wages
A) will always be at market-clearing levels.
B) will, on average, be set at market-clearing levels.
C) will always be above market-clearing levels.
D) will never be set at market-clearing levels.

Question

Quizplus · Accepted Answer

Rational expectations mean that firms take into account all available information when setting prices and wages, including expected future demand and supply conditions. Therefore, on average, prices and wages will be set at market-clearing levels. However, there may be temporary deviations due to unexpected shocks or imperfect information.

If Firms Have Rational Expectations and If They Set Prices