Which statement best characterizes the theory of rational expectations?
A) It suggests that estimates of the sacrifice ratio should be used to guide policy.
B) It concerns how people use information to predict the future.
C) It explains why the long-run Phillips curve is vertical.
D) It explains how people act when there is unemployment and workers must be rationed.

Question

Quizplus · Accepted Answer

The theory of rational expectations concerns how people use information to predict the future, based on the idea that individuals base their expectations on all available information, including their own experiences and knowledge. It is not related to estimating sacrifice ratios, explaining the long-run Phillips curve, or how people act during unemployment.

Which Statement Best Characterizes the Theory of Rational Expectations