Q3 (10 points). (i) The key assumption characterizing the Rational Expectations

Question

Q3 (10 points). (i) The key assumption characterizing the Rational Expectations Theory (RET) to expectation formation is that: A. people make optimal use of whatever information they have when forming their expectations. B. people do not make sudden changes in their expectations. C. people do not make use of observations from the past in forming their expectations because these observations are out-of-date. D. people are able to form expectations about future conditions without error. i)4 points] (ii). Under RET what hypothesis is made about the forecasting error?i) 6 points]

Explanation / Answer

(i) A,people make use of whatever information they have in optimal way

(ii) under RET,equilibrium results are similar to expectations.so people make optimal use of the information they have while forming their expectations.

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