Question

Questions regarding rational expectations, thank you!:

1.) Which of the following statements about rational expectations is not true?

a.) Rational expectations are different from adaptive expectations

b.) Rational expectations are identical to optimal forecasts

c.) Rational expectations may not be accurate

d.) Rational expectations theory suggests that forecasts errors of expectations are sizable and can be predicted

2.) Suppose that the average growth rate of the economy has been 2%. Given a forecast of 4% growth this year, if rational expectations hold, then the expected forecast is __%

3.) The efficient market hypothesis is an application of the theory of rational expectations. (true or false)

Answer 1

1) Solution: Rational expectations theory suggests that forecasts errors of expectations are sizable and can be predicted

Explanation: The rational expectations reflect optimal forecasts with a proper usage of available information. It states that if expectations have room for improvement they will not be termed not rational thus it does not suggest anything about forecast errors

　

2) Solution: 0%

Explanation: Rational expectations states that the forecast errors will on average be zero and thus can be predicted ahead of time

　

3) Solution: True

Explanation: The efficient market hypothesis applies the rational expectations theory.