According to the rational expectations theory,
A) on average people have very little idea of what to expect from government policy makers.
B) people form expectations by focusing only on the private sector.
C) people do not consider likely government policies when forming expectations.
D) people form expectations, in part, by considering the probable future effects of changes in government policy.

Question

Quizplus · Accepted Answer

The rational expectations theory assumes that people form expectations by considering all available information, including probable future effects of changes in government policy. Therefore, option D is the correct answer. Option A is incorrect because the theory assumes that people do have a general understanding of the policy-making process. Option B is incorrect because the theory assumes that people consider information on both the private and public sectors. Option C is incorrect because the theory assumes that people do consider likely government policies when forming expectations.

According to the Rational Expectations Theory