When expectations are rational, prices and wages are, on average, set at market-clearing levels.

Question

Quizplus · Accepted Answer

Rational expectations imply that individuals have accurate information about the economy and adjust their behavior accordingly. In this case, market-clearing prices and wages are those that equate the quantity of goods and services supplied with the quantity demanded. Therefore, rational expectations would lead to the setting of market-clearing prices and wages on average.

When Expectations Are Rational, Prices and Wages Are, on Average