Which of the following is true about 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 in the context of monetary policy only.
E)The effectiveness of a particular government policy is independent of people's expectations.

Question

Quizplus · Accepted Answer

Rational expectations theory assumes that people use all available information, including past events and the expected future actions of policymakers, to form their expectations about the economy. Therefore, choice A is true about rational expectations. Choice B is incorrect because wage agreements can reflect inflationary expectations, even if workers expect continued inflation. Choice C is incorrect because one of the core assumptions of rational expectations is that people can anticipate the effects of policy on the economy. Choice D is incorrect because the role of expectations applies to all areas of economic policy, not just monetary policy. Choice E is incorrect because the effectiveness of government policy is highly dependent on people's expectations and their reactions to policy changes.

Which of the Following Is True About Rational Expectations