According to advocates of rational expectations, traditional estimates of the sacrifice ratio are unreliable because they:

Question

Quizplus · Accepted Answer

Rational expectations theorists argue that people form expectations based on all available information, including past policy actions, so using estimates based on adaptive expectations (which assume that people use only past information to form expectations) is unreliable. This affects estimates of the sacrifice ratio because the sacrifice ratio is based on the trade-off between inflation and unemployment that results from a monetary policy shock. If people form expectations in a more forward-looking manner, as rational expectations theorists argue, then the trade-off may be different than what is estimated using adaptive expectations.

According to Advocates of Rational Expectations, Traditional Estimates of the Sacrifice