The rational expectations hypothesis indicates that people
A) pay little attention to policy when forming their expectations about the future.
B) expect the next period to be pretty much like the recent past, regardless of policy changes.
C) will always be able to forecast the future accurately.
D) change their expectations about the future if policy changes.

Question

Quizplus · Accepted Answer

The rational expectations hypothesis suggests that individuals will adjust their expectations about the future if there is a change in policy. Therefore, option D is the correct choice as it accurately describes how people factor in policy changes when forming their expectations. Option A is incorrect as it suggests that people do not consider policy at all, which goes against the rationale of the hypothesis. Option B is also incorrect as it assumes that people's expectations are based solely on past trends, without considering any changes in policy. Option C is incorrect as it is practically impossible for individuals to always forecast the future accurately, regardless of the hypothesis.

The Rational Expectations Hypothesis Indicates That People