Define the Theory of Rational Expectations

question 171

Essay

Define the theory of rational expectations. Explain the following statement: "An economist who believes in rational expectations argues that all markets, on average, will settle at equilibrium levels."

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Definitions:

Accrual Entry

An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.

Accounting Accruals

Accounting method where revenue and expenses are recorded when they are earned or incurred, not necessarily when cash is received or paid.

Unpaid Payroll

The total sum of all wages, salaries, bonuses, and deductions owed to employees that have not yet been paid.

Depreciation

The accounting process of allocating the cost of a tangible asset over its useful life, reflecting decrease in value over time.