According to the rational expectations concept:
A) we should expect the economy to always face high rates of inflation.
B) we should expect most government economic policies to be successful.
C) businesses and households may distort the effects of economic policies through their reactions to those policies.
D) monetary policy adjustments should be announced in advance so that businesses and households have time to react.

Question

Quizplus · Accepted Answer

The rational expectations concept suggests that individuals and businesses use all available information to make forecasts and thus can anticipate government economic policies, potentially neutralizing or altering their intended effects. This means that the reactions of businesses and households, based on their expectations, can indeed distort the outcomes of those policies.

According to the Rational Expectations Concept