According to the rational expectation hypothesis, unpredictable shocks may cause
A) disequilibrium in the labor market.
B) uncontrollable inflation.
C) long-lasting recession.
D) sustained levels of unemployment.

Question

Quizplus · Accepted Answer

The rational expectation hypothesis suggests that individuals form expectations about the future based on all available information, including the understanding of economic policies and theories. While unpredictable shocks can cause temporary disequilibrium in various markets, including the labor market, the hypothesis implies that markets adjust as individuals update their expectations with new information, thus not necessarily leading to uncontrollable inflation, long-lasting recession, or sustained levels of unemployment.

According to the Rational Expectation Hypothesis, Unpredictable Shocks May Cause