Briefly Explain the Rational Expectation Hypothesis

question 46

Essay

Briefly explain the rational expectation hypothesis.What are the basic assumptions of the hypothesis? What are the implications of the rational expectation hypothesis for the monetary policy effects on output? Do empirical studies support the idea of rational expectations?

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Definitions:

Voluntary Behavior

Actions that are under conscious control, as opposed to automatic or reflexive behaviors.

Thorndike's Law

A principle of learning that emphasizes the effect of rewards and punishments on behavior, suggesting that actions followed by positive outcomes are reinforced and more likely to be repeated.

Pleasurable Consequence

A positive outcome or reward that follows a behavior, making it likely that the behavior will be repeated in the future.

Involuntary

Actions or reactions that occur without conscious control or choice.