Question

The rational expectations hypothesis implies that when macroeconomic policy changes, A) the economic expectations will be...

The rational expectations hypothesis implies that when macroeconomic policy changes,

A) the economic expectations will be formed using all new information.
B) the economic expectations will be formed using all relevant information.
C) the economic expectations will be formed using partial information.

D) the economic expectations will be formed using information seen to be used by others.

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Answer #1

Many economist said that adaptive expectation is too narrow in nature because it looks into the past data only, doesn't consider the current period data that could be important.

On the other hand, rational expectations are based on all relevant information available. The rational expectations hypothesis implies that when macroeconomics policy changes, the economic expectations will be formed using all relevant information.

So, the correct answer is an option (B).

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