According to the rational expectations hypothesis, unemployment is caused by which factor?

• A. Deficient level of aggregate demand
• B. Unpredictable shocks
• C. Imperfect information
• D. Downwardly rigid wages

Answer: (B)

Rational expectations mean people use all available information to forecast the future and adjust their plans accordingly. When expectations are model-consistent, predictable changes in the economy don’t surprise anyone and don’t have lasting real effects. Unemployment only moves because of shocks that are unexpected and cannot be foreseen in advance. If a shock is anticipated, workers and firms adjust before it hits, so unemployment doesn’t rise due to that shock. Therefore, the factor that explains unemployment in this framework is unpredictable shocks.

Deficient aggregate demand, imperfect information, and wage rigidity describe other theoretical angles, but they’re not the mechanism emphasized by rational expectations.