Question

pick one of the following to drscribe fully: hysteresis, rational expectations or quantitative easing

Answer 1

Rational expectations theory

The theory explains  that individuals base their decisions on three primary factors: their human rationality, the information available to them, and their past experiences. It 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 that, along with other indicators, to anticipate future inflation . The rational expectations theory is the dominant assumption model used in business cycles and finance as a cornerstone of the efficient market hypothesis.

Important Facts for Rational Expectations .

• Individuals use their ability to rationalise while they make decisions.
• On average, people will hold expectations that will be fulfilled.
• Rational expectations are the best guess for the future.
• People may be wrong some of the time, but on average they are right.
• People learn from past mistakes.
• Values of variables like price, output, and employment are important.
• People behave in ways to maximise their enjoyment of life.
• People behave in ways to maximise their profits.
• Expectations about future inflation will affect current buying decisions.
• Individuals will create expectations based on available information.
• Resulting predictions will be close to the market equilibrium.