Question

Which of the following statements about rational expectations is true?

A. Rational expectations are the same as adaptive expectations.
B. Rational expectations are identical to optimal forecasts
C. Rational expectations are always accurate.
D. Rational expectations theory suggests that forecasts errors of expectations are sizable and can be predicted

Answer 1

Rational expectations are identical to optimal forecasts because they use all available information to predict future events as accurately as possible, distinguishing them from adaptive expectations.

Step-by-step explanation:

The correct statement about rational expectations is that they are identical to optimal forecasts. Rational expectations theory operates under the premise that people form the most accurate possible expectations about the future that they can, using all information available to them. Unlike adaptive expectations, which are backward-looking and adapt as experience accumulates, rational expectations are more forward-looking and incorporate all available information to predict future events as accurately as possible. Therefore, while rational expectations are based on the use of all available information, they are not guaranteed to be always accurate, and forecast errors are unpredictable because future events can introduce unexpected variables that weren't considered.