The rational expectations approach assumes that
A)people never make any mistakes in forming inflationary expectations
B)people do make mistakes in their forecasts from time to time, but they do not make any systematic mistakes
C)people change their inflationary expectations only long after it has become clear that they were wrong
D)unannounced policy changes have little effect on output since people change their inflationary expectations only very slowly
E)none of the above

Question

Quizplus · Accepted Answer

The rational expectations approach assumes that people do make mistakes in their forecasts from time to time, but they do not make any systematic mistakes. This means that individuals are assumed to be rational and use all available information to form expectations about the future. While they may make occasional errors, these are random and do not persist over time.

The Rational Expectations Approach Assumes That