The rational-expectations hypothesis suggests that errors in forecasting future inflation rates are due to
A) random, unpredictable events.
B) the fact that people assume that the current inflation rate will continue into the future.
C) the fact that people consistently underestimate future inflation.
D) the fact that people consistently overestimate future inflation.

Question

Quizplus · Accepted Answer

The rational-expectations hypothesis posits that although people may not predict the future perfectly, their errors are random and not systematically biased. This is because they use all available information efficiently, including understanding of economic policies and theories, to make forecasts. Thus, errors in forecasting future inflation rates under this hypothesis are attributed to random, unpredictable events rather than systematic underestimation or overestimation.

The Rational-Expectations Hypothesis Suggests That Errors in Forecasting Future Inflation