The hypothesis that people know the "true model" of the economy and that they use this model to form their expectations of the future is the
A) real business cycle hypothesis.
B) Lucas supply function hypothesis.
C) rational-expectations hypothesis.
D) Laffer hypothesis.

Question

Quizplus · Accepted Answer

The hypothesis that people have rational expectations and use all available information, including the "true model" of the economy, to form their expectations is the rational-expectations hypothesis. This theory was developed by economist Robert Lucas and is widely used in macroeconomic analysis. The other options (A, B, and D) do not address this specific hypothesis.

The Hypothesis That People Know the "True Model" of the Economy