Forecasts satisfying rational expectations are too high or too low with equal probability.

Question

Quizplus · Accepted Answer

Rational expectations theory posits that individuals form forecasts of future values of variables using all available information, including the models that the economy is believed to follow. Therefore, errors in forecasts are not systematically biased to be too high or too low; they are as likely to be one as the other, assuming the model and information set are correct.

Forecasts Satisfying Rational Expectations Are Too High or Too Low