Which of the following is consistent with the rational expectations theory?
A)John is always right on his predictions of stock market prices.
B)Janice always underestimates inflation rates.
C)Michael always overestimates the effect of government purchases on GDP during recessions.
D)Mona is rarely right in her predictions of stock prices,but her errors are random.

Question

Quizplus · Accepted Answer

The rational expectations theory assumes that people make predictions based on all available information and their best understanding of how the economy works. This means that errors in predictions are based on random factors, rather than consistent biases or inaccuracies. Therefore, Mona's errors being random is consistent with the theory. Choices A, B, and C imply consistent biases in predictions, which is not consistent with the rational expectations theory.

Which of the Following Is Consistent with the Rational Expectations