The Rational Expectations Hypothesis Is a Theory That States That

question 61

Multiple Choice

The rational expectations hypothesis is a theory that states that

• A)individuals can predict the future perfectly,at least with respect to macroeconomic variables like the interest rate and inflation.
• B)people make their economic plans by using all available past and present information and their understanding about how the economy operates.
• C)people make their economic plans in an irrational,intuitive manner.
• D)people make their economic plans by relying on the policy statements made by the Prime Minister and leaders in Parliament.

---

Definitions:

Income

The financial compensation gained from selling goods or services, or through other means such as rental income or investments.

Utility Function

An economic concept representing a user's satisfaction levels with varying consumption of goods or services, ranked from less to more preferred.

Interest Rate

The slice of a loan that generates interest charges for the borrower, often cited as an annual percentage of the yet-to-be-paid loan amount.

Inflation

An economic condition characterized by a general increase in prices and fall in the purchasing value of money.