In the view of rational expectations theory,
A) people make economic forecasts that are based on insider-outsider relationships and self- fulﬁlling prophecies.
B) people form beliefs about future economic outcomes that accurately reﬂect the likelihood that those outcomes will occur.
C) people form their expectations on present realities and only gradually change their expectations as experience unfolds.
D) the economy does not respond quickly to changes in prices, which causes a misallocation of economic resources.

Question

Quizplus · Accepted Answer

Rational expectations theory states that people form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur. This means that individuals use all available information, including recent economic trends and policies, to make informed predictions about future events. These predictions are not influenced by insider-outsider relationships or self-fulfilling prophecies, as suggested in option A, nor are they solely based on present realities, as stated in option C. Option D is also incorrect, as rational expectations theory does not suggest that the economy does not respond quickly to changes in prices, but rather that individuals use available information to anticipate the effects of such changes.

In the View of Rational Expectations Theory