The Rational-Expectations Hypothesis Suggests That Errors in Forecasting Future Inflation

question 97

Multiple Choice

The rational-expectations hypothesis suggests that errors in forecasting future inflation rates are due to

• A) random, unpredictable events.
• B) the fact that people assume that the current inflation rate will continue into the future.
• C) the fact that people consistently underestimate future inflation.
• D) the fact that people consistently overestimate future inflation.

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Definitions:

Big Mac

A hamburger sold by McDonald's that is often used as an informal measure of purchasing power parity between currencies.

Depreciates

The decrease in value of an asset over time or in response to changes in market conditions.

Euro

The Euro is the official currency of the Eurozone, which consists of 19 of the 27 European Union member states, serving as one of the world's major currencies.

Real Exchange Rate

The rate at which two currencies can be exchanged after adjusting for their respective inflation rates.