If Firms Have Rational Expectations and If They Set Prices

question 16

Multiple Choice

If firms have rational expectations and if they set prices and wages on this basis, then on average

• A) prices and wages will be set at levels that do not clear the goods and labor markets.
• B) prices will be set at levels that ensure equilibrium in the goods market, but wages will be set at levels that do not clear the labor market.
• C) prices and wages will be set at levels that ensure equilibrium in the goods and labor markets.
• D) wages will be set at levels that ensure equilibrium in the labor market, but prices will be set at levels that do not clear the goods market.

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Definitions:

Suprachiasmatic Nucleus

A region of the brain in the hypothalamus responsible for controlling circadian rhythms.

Pineal Gland

A small endocrine gland in the brain that produces melatonin, a hormone that regulates sleep-wake cycles and seasonal biological rhythms.

Biological Clock

An internal mechanism that regulates bodily rhythms and cycles, such as sleep and wakefulness, over approximately a 24-hour period.

Melatonin

A hormone produced by the pineal gland that regulates sleep-wake cycles, its production increases in darkness to promote sleep.