The Rational Expectations Hypothesis Implies That When Macroeconomic Policy Changes

question 12

Multiple Choice

The rational expectations hypothesis implies that when macroeconomic policy changes

• A)the economy will become highly unstable.
• B)the way expectations are formed will change.
• C)people will be slow to catch on to the change.
• D)people will make systematic mistakes.

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Definitions:

Standard Deviation

Square root of the weighted average of the squares of the deviations of the payoffs associated with each outcome from their expected values.

Over-precision

A cognitive bias causing someone to be too confident in their own judgments and decisions.

Predict Outcomes

The process of forecasting the possible results of a particular situation or decision.

Unrealistic Belief

A conviction or perception not supported by evidence or reality, often overly optimistic or pessimistic about potential outcomes.