In the view of rational expectations theory:
A) People make economic forecasts that are based on insider-outsider relationships and self-fulfilling prophecies
B) People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur
C) People form their expectations on present realities and only gradually change their expectations as experience unfolds
D) The economy does not respond quickly to changes in prices, which causes a mis-allocation of economic resources

Question

Quizplus · Accepted Answer

Rational expectations theory states that people form expectations based on all available information, including their knowledge of economic relationships and past experiences. Therefore, people's beliefs accurately reflect the likelihood that certain economic outcomes will occur. This means that self-fulfilling prophecies and insider-outsider relationships are not the basis for economic forecasts, as stated in option A. Option C is incorrect because the theory does not assume that people only gradually change their expectations as experience unfolds. Option D is also incorrect because rational expectations theory assumes that prices and other economic variables respond quickly to changes in the economy.

In the View of Rational Expectations Theory