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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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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