According to the theory of rational expectations, errors in predicting inflation will
A) be biased upward more often than not.
B) be purely random.
C) tend to be biased downward when inflation is rising, and tend to be biased upward when inflation is falling.
D) tend to be biased upward when inflation is rising, and tend to be biased downward when inflation is falling.

Question

Quizplus · Accepted Answer

According to the theory of rational expectations, errors in predicting inflation will be purely random. This is because individuals and firms in the economy will use all available information to make their predictions, and any systematic errors would be quickly corrected as they would create opportunities for profit. Therefore, in the long run, the errors will cancel out and be purely random.

According to the Theory of Rational Expectations, Errors in Predicting