If expectations are rational, the difference between the actual inflation rate and the forecast for inflation is:
A)positive when inflation is increasing.
B)negative when inflation is increasing.
C)random.
D)greater, the more accurately people anticipate the effects of government policy.

Question

If expectations are rational, the difference between the actual inflation rate and the forecast for inflation is:
A)​positive when inflation is increasing.
B)​negative when inflation is increasing.
C)​random.
D)​greater, the more accurately people anticipate the effects of government policy.

Quizplus · Accepted Answer

Rational expectations theory suggests that individuals and businesses use all available information efficiently to predict future events, including inflation. Therefore, the difference between the actual inflation rate and the forecast for inflation would be random, as forecasts would already incorporate expectations about future inflation, making systematic errors unlikely.

If Expectations Are Rational, the Difference Between the Actual Inflation