Rational Expectations Theory Assumes That

question 90

Multiple Choice

Rational expectations theory assumes that:

• A) people behave rationally and that all product and resource prices are flexible both upward and downward.
• B) firms pay above-market wages to elicit work effort.
• C) markets fail to coordinate the actions of households and businesses.
• D) markets are dominated by monopolistic firms.

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Definitions:

Economic History

The study of how economic phenomena evolved in the past.

Inflation

An increase in the general price level of goods and services in an economy over a period of time.

Cost-Push Inflation

Inflation resulting from a rise in the cost of inputs such as labor, raw materials, and so forth, which subsequently reduces the availability of these goods.

Aggregate Demand Curve

A graphical representation showing the total demand for all goods and services in an economy at different price levels.