The Rational Expectations Argument Relies on

question 115

Multiple Choice

The rational expectations argument relies on

• A) wages and prices being sticky so that changes in expectations about future economic activity and the price level will prevent the short-run aggregate supply curve from shifting quickly to restore long-run equilibrium.
• B) the ability of monetary policy authorities to identify and respond quickly to close output gaps and restore the economy to its long-run equilibrium.
• C) wages and prices being sufficiently flexible so that the change in expectations about future economic activity and the price level will allow the short-run aggregate supply curve to shift quickly to restore long-run equilibrium.
• D) wages and prices being sufficiently flexible so that changes in expectations about future economic activity and the price level will allow the aggregate demand curve to shift quickly to restore long-run equilibrium.

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Definitions:

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Extraordinary Item

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Extraordinary Losses

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