Answer to Question #290899 in Macroeconomics for lisa

Question

Suppose wages and prices are flexible, people form their expectations rationally, and they anticipate policy incorrectly. What happens?

Answer 1

Solution:

When people form their expectations rationally and they anticipate policy incorrectly, wages and prices will remain flexible in the future, thus resulting in high unemployment levels and high inflation.

This is because rational people would expect wages and prices to be stable in the future due to certain policies that will be adopted by the government. If the anticipated policies do not occur as eexpected, then wages and prices won't be able to adjust. This will result in high levels of unemployment and inflation levels in an economy.