Which of the following statements best describes the rational expectations hypothesis?
A)Individuals will not enter into long-term agreements unless they are certain about the payments they will receive.
B)It is likely that individuals will consistently make errors.
C)Individuals will make random errors,independent of previous errors.
D)It is reasonable to expect individuals to consistently underestimate the level of inflation.

Question

Quizplus · Accepted Answer

The rational expectations hypothesis suggests that although individuals may make errors in predicting future events, these errors are random and not systematically biased in one direction or another. This means that over time, the errors will not consistently be too high or too low but will average out, indicating that individuals' expectations are, on average, accurate.

Which of the Following Statements Best Describes the Rational Expectations