Rational expectations assume that individuals:
A) can accurately predict the future.
B) make predictions based on the past behaviour of the economy.
C) do not make systematic forecast errors.
D) have perfect foresight.
E) form their predictions of macroeconomic variables randomly.

Question

Quizplus · Accepted Answer

Rational expectations assume that individuals do not make systematic forecast errors, meaning that they take all available information into account when forming their predictions and do not consistently over- or underestimate future outcomes. However, this does not mean that they are able to accurately predict the future or have perfect foresight. They use all available information, including past behavior of the economy, to make their predictions, but these predictions are not formed randomly.

Rational Expectations Assume That Individuals