Question

the rational expectation view that expectation regarding policy and its effect are important to c quislistonsider

Answer 1

The rational expectations theory is a concept and modeling technique that is used widely in macroeconomics.

The theory posits that individuals base their decisions on three primary factors: their human rationality, the information available to them, and their past experiences. It suggests that people’s current expectations of the economy are, themselves, able to influence what the future state of the economy will become. This precept contrasts with the idea that government policy influences financial and economic decisions.

Economists often use the doctrine of rational expectations to explain anticipated inflation rates. For example, if past inflation rates were higher than expected, then people might consider this, along with other indicators, to mean that future inflation also might exceed expectations.

The rational expectations theory is the dominant assumption model used in business cycles and finance as a cornerstone of the efficient market hypothesis (EMH).