Rational expectations theory implies that the
A) aggregate demand curve is vertical.
B) long-run aggregate supply curve is vertical.
C) long-run aggregate supply curve is horizontal.
D) long-run aggregate supply curve is quite ﬂat.

Question

Quizplus · Accepted Answer

Rational expectations theory implies that firms and workers will adjust their expectations of future prices and wages based on all available information, including past trends and government policies. This means that any changes in aggregate demand are reflected in changes in prices rather than changes in output. Therefore, the long-run aggregate supply curve is vertical because it represents the maximum amount of output that can be produced given available resources and the level of technology, and it is not affected by changes in aggregate demand.

Rational Expectations Theory Implies That the