According to rational expectations theory, observed instability in the private economy would most likely be due to
A) changes in aggregate supply.
B) inappropriate monetary policy.
C) the instability of investment spending in the economy.
D) unanticipated aggregate demand and aggregate supply shocks in the short run.

Question

Quizplus · Accepted Answer

According to the rational expectations theory, in the long run, agents in the economy will correctly anticipate any changes in government policy and will adjust their behavior accordingly. However, in the short run, unanticipated aggregate demand and aggregate supply shocks can lead to instability in the private economy, as agents may not have enough time to adjust their behavior. Therefore, the observed instability in the private economy would most likely be due to unanticipated aggregate demand and aggregate supply shocks.

According to Rational Expectations Theory, Observed Instability in the Private