The theory of rational expectations is consistent with which statement?
A) It takes into account only current information about inflation.
B) It takes into account only past information about inflation.
C) It takes into account past rates of inflation and available information about monetary and fiscal policy.
D) A government attempt to trade off higher inflation for lower unemployment would work in the short run but would eventually fail because higher inflation would get built into expectations.

Question

Quizplus · Accepted Answer

The theory of rational expectations takes into account past rates of inflation and available information about monetary and fiscal policy, which allows individuals to form expectations about future inflation rates. This makes choice C the most consistent with the theory. Choice A and B are incorrect as the theory of rational expectations takes into account both current and past information. Choice D is a correct statement, but it does not directly relate to the consistency of the theory of rational expectations.

The Theory of Rational Expectations Is Consistent with Which Statement