Rational expectations theory:
A) holds that people form expectations on the basis of all available information.
B) holds that people's expectations of future inflation are based on their most recent experience.
C) explains why prices are flexible in the long run.
D) holds that people form expectations perfectly.
E) explains the relationship between the unemployment rate and inflation.

Question

Quizplus · Accepted Answer

Rational expectations theory posits that people form expectations based on all available information. This includes past experiences, current economic conditions, and expectations regarding future events. This theory assumes that people try to make the best possible use of the information available to them in order to maximize their outcomes. In other words, individuals are rational in their expectations.

Rational Expectations Theory