When individuals form expectations using information efficiently and without systematic errors, then they
A)can never be wrong with any of their price expectations
B)are never surprised by unannounced money supply changes
C)never supply more labor even if their nominal wage rate increases
D)have adaptive expectations
E)have rational expectations

Question

Quizplus · Accepted Answer

Rational expectations are formed when individuals use all available information to make predictions and expectations, without errors or biases. This implies that their predictions are as accurate as possible given the information available to them. This also means that they are not surprised by unexpected shocks to the economy, such as changes in the money supply, and that they respond rationally to changes in their nominal wage rates, for example by adjusting their supply of labor.

When Individuals Form Expectations Using Information Efficiently and Without Systematic