The theory of rational expectations is CONSISTENT with which of the following statements?
A)It takes into account only current information about inflation.
B)It takes into account only past information about inflation.
C)It takes into account past rates of inflation and available information about monetary and fiscal policy.
D)A government attempt to trade off higher inflation for lower unemployment would work in the short run but would eventually fail because higher inflation would get built into expectations.

Question

Quizplus · Accepted Answer

The theory of rational expectations assumes that individuals use all available information, including past rates of inflation and information about monetary and fiscal policy, to form their expectations of future inflation. Option A is incorrect because the theory does not rely solely on current information. Option B is incorrect because it does not account for the use of current information. Option D is incorrect because it suggests that rational expectations would not anticipate the consequences of a government attempting to trade off inflation and unemployment.

The Theory of Rational Expectations Is CONSISTENT with Which of the Following