Within the aggregate demand-aggregate supply framework, a strict interpretation of rational expectations theory suggests that a change in aggregate
A) demand will have a large effect on the price level but a small effect on output.
B) demand will have a small effect on the price level but a large effect on output.
C) demand will have a large effect on the price level but no effect on output.
D) supply will have a large effect on the price level but no effect on output.

Question

Quizplus · Accepted Answer

Rational expectations theory assumes that individuals correctly anticipate the effects of economic policies on the economy. Therefore, a change in aggregate demand would only have an impact on the price level since output is at its potential level in the long run.

Within the Aggregate Demand-Aggregate Supply Framework, a Strict Interpretation of Rational