The rational expectations approach differs from the perfect foresight approach, since it assumes that
A)markets do not clear rapidly
B) people make systematic errors in their forecasts
C)the monetary policy multiplier is always zero
D)people may not always be right but their best guess of the forecast error is zero
E)none of the above

Question

Quizplus · Accepted Answer

The rational expectations approach assumes that people may not always be right in their forecasting, but their best guess of the forecast error is zero. This means that people take all available information into account when making their forecasts, and any errors they make are random and not systematic. None of the other options accurately describe the rational expectations approach.

The Rational Expectations Approach Differs from the Perfect Foresight Approach