Proponents of rational expectations argue that failing to account for peoples' revised inflation expectations led to estimates of the sacrifice ratio that were too high.

Question

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Rational expectations theory posits that individuals form their expectations about the future based on all available information, including anticipated policy changes. If policymakers fail to account for how people adjust their inflation expectations in response to policy actions, they might overestimate the sacrifice ratio, which measures the cost of reducing inflation in terms of lost output.

Proponents of Rational Expectations Argue That Failing to Account for Peoples