One of the basic assumptions of rational expectations theory is that
A) people can anticipate the future effects of policy changes and the actions they take may offset the effects of economic policy.
B) people are not able to assess the future effects of policy changes, so government can use economic policy effectively.
C) markets are not very competitive and fail to adjust quickly to changes in demand and supply.
D) people expect government to solve the major unemployment and inﬂation problems facing the nation and behave accordingly.

Question

Quizplus · Accepted Answer

Rational expectations theory assumes that individuals have rational, forward-looking expectations and are able to anticipate the future effects of policy changes. As a result, their actions may offset the intended effects of economic policy. This assumption suggests that government intervention in the economy may be less effective than expected because individuals can anticipate and adjust their behavior accordingly. Option B is incorrect because rational expectations theory assumes that individuals can assess the future effects of policy changes. Option C is incorrect because the theory assumes markets are competitive and able to adjust to changes in demand and supply. Option D is also incorrect because the theory assumes that individuals do not rely on government to solve economic problems.

One of the Basic Assumptions of Rational Expectations Theory Is