The theory of rational expectations suggests that the forecasts made using the rational expectations model:
A) consistently underestimate the actual rate of inflation in the future.
B) are correct on average.
C) consistently overestimate the actual rate of inflation in the future.
D) are always correct.

Question

Quizplus · Accepted Answer

The theory of rational expectations suggests that individuals use all available information to form their expectations of future events, including inflation. As a result, the forecasts made using the rational expectations model are unbiased and correct on average. While there may be variations in individual forecasts, the average forecast should match the actual rate of inflation over time. Therefore, choice B is the best answer.

The Theory of Rational Expectations Suggests That the Forecasts Made