A rational expectation of inflation is
A) why unexpected inflation redistributes income.
B) a forecast of inflation that uses all relevant information.
C) how economists make perfect forecasts of inflation.
D) how unexpected inflation affects the economy.

Question

Quizplus · Accepted Answer

A rational expectation of inflation is a forecast of inflation that uses all relevant information. It is based on the idea that individuals will make predictions based on all available information, including past inflation rates, current monetary policy, and other economic indicators. This contrasts with adaptive expectations, which assume that individuals base their predictions solely on past inflation rates. Rational expectations are important in economic models because they help to explain how individuals and markets behave in response to changes in policy or economic conditions.

A Rational Expectation of Inflation Is