The rational-expectation hypothesis suggests that the forecasts that people make concerning future inflation rates ?
Correct answer: D. are correct on average, but are subject to errors that are distributed randomly
- A. consistently overestimate the actual rate of inflation in the future.
- B. are always correct
- C. consistently underestimate the actual rate of inflation in the future
- D. are correct on average, but are subject to errors that are distributed randomly
Explanation
Rational expectations do not imply perfect forecasts; people use available information, so their errors may occur but should not show a systematic bias. Thus forecasts are correct on average with randomly distributed errors.
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