If all firms have rational expectations and wages and prices are flexible, there will be
A) high unemployment because firms set their wages above the equilibrium wage rate.
B) a shortage of labor because firms set their wage below the equilibrium wage rate.
C) no unemployment.
D) high unemployment because firms know the "true model."

Question

Quizplus · Accepted Answer

If all firms have rational expectations and wages and prices are flexible, the labor market will clear and there will be no unemployment. This is because both workers and firms will adjust their expectations and wages/prices to the equilibrium level, ensuring that all workers who are willing and able to work at that wage rate are employed.

If All Firms Have Rational Expectations and Wages and Prices