Rational expectations theory
A) holds that people form expectations on the basis of all available information.
B) holds that people's expectations of future inflation are based on their most recent experiences.
C) explains why prices are flexible in the long run.
D) holds that people form expectations perfectly.
E) explains the relationship between the unemployment rate and inflation.

Question

Quizplus · Accepted Answer

Rational expectations theory holds that people form expectations on the basis of all available information, meaning that they incorporate all past, current, and potential future events and data in their expectations. This suggests that individuals make rational and informed decisions based on the best available information they have.

Rational Expectations Theory