The rational-expectations hypothesis suggests that the forecasts that people make concerning future inflation rates
A) are always correct.
B) consistently overestimate the actual rate of inflation in the future.
C) are correct on average, but are subject to errors that are distributed randomly.
D) consistently underestimate the actual rate of inflation in the future.

Question

Quizplus · Accepted Answer

The rational-expectations hypothesis suggests that people's forecasts are correct on average, but subject to errors that are distributed randomly. This means that some individual forecasts may be too high or too low, but the errors will cancel each other out when looking at the average forecast of a large group of people.

The Rational-Expectations Hypothesis Suggests That the Forecasts That People Make