Which of the following is true of rational expectations?
A) People form expectations on the basis of information about past as well as future actions of policy makers.
B) Wage agreements do not reflect inflationary expectations if workers expect continued inflation.
C) Rational people cannot easily anticipate the effects of discretionary policy on the price level and output.
D) The role of expectations is applicable only in the context of monetary policy.
E) The effectiveness of a particular government policy is independent of people's expectations.

Question

Quizplus · Accepted Answer

Rational expectations theory suggests that people form their expectations about future economic variables (such as prices, wages, and employment) based on all available information, including information about past policy actions and expected future policy actions. Therefore, option A is correct. Option B is incorrect because if workers expect continued inflation, they will likely demand higher wages to compensate, which would reflect inflationary expectations. Option C is incorrect because the rational expectations theory assumes that people have perfect knowledge and understanding of the economy and can anticipate the effects of policy changes on economic variables. Option D is incorrect because expectations play a role in all economic contexts, not just in monetary policy. Option E is incorrect because the effectiveness of government policy depends on people's expectations and how they respond to policy changes.

Which of the Following Is True of Rational Expectations