If people behave according to rational expectations theory, people would expect the rate of inflation this year to be:
A) the same as last year.
B) zero, regardless of the rate last year.
C) the rate based on predictable monetary and fiscal policies.
D) always higher than last year.

Question

Quizplus · Accepted Answer

According to rational expectations theory, people form their expectations based on all available information, including predictable monetary and fiscal policies. Therefore, they would expect the rate of inflation this year based on those policies, which could result in an increase or decrease from the rate last year.

If People Behave According to Rational Expectations Theory, People Would