The rational expectations theory claims that workers and firms will not make systematic errors when they forecast inflation.

Question

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The rational expectations theory proposes that economic agents (workers and firms) have access to all available information and use it to form their expectations in a rational way. Therefore, they will incorporate any changes in economic policies, central bank actions, or other shocks that affect inflation into their expectations, leading to accurate forecasts. This theory assumes that there are no persistent market inefficiencies, such as price rigidities or information asymmetries, that prevent economic agents from adjusting their expectations in response to new information.

The Rational Expectations Theory Claims That Workers and Firms Will