What is meant by rational expectations

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1. Explain why expectations of inflation affect the wages that result from labor-management bargaining.

2. What is meant by "rational" expectations? Why does the hypothesis of rational expectations have such stunning implications for economic policy? Would believers in rational expectations want to shorten a recession by expanding aggregate demand? Would they want to fight inflation by reducing aggregate demand? Relate this analysis to your answer to Test Yourself Question 1.

Reference no: EM131353725

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