The theory of rational expectations states that:
A) people make decisions optimally as often as they make decisions less than optimally.
B) expectations about future real wages are often irrational.
C) people make decisions using all available information.
D) designing effective economic policy is very difficult because of the shortage of information.

Question

Quizplus · Accepted Answer

The theory of rational expectations posits that people make decisions using all available information, and therefore, their expectations about future outcomes are based on rational analysis of that information. This theory is often applied to macroeconomic policymaking, as policymakers must take into account how individuals and firms will react to changes in policy based on their rational expectations.

The Theory of Rational Expectations States That