In 1997, the British government suddenly announced that the central bank, the Bank of England, would become independent. Evidence shows that the public immediately began to expect lower inflation. This behavior in forming expectations is consistent with _____ expectations.

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals form their expectations about the future based on all available information. In this case, the public expected lower inflation upon hearing the announcement of the Bank of England's independence, presumably because they believed an independent central bank would be more effective at controlling inflation. This demonstrates the use of available information to update expectations, consistent with rational expectations.

In 1997, the British Government Suddenly Announced That the Central