Arizona State University (ASU) ECN 211 Macroeconomic Principles Exam 1 Practice

Rational expectations means people form forecasts using all available information and in a way that is consistent with the true model of how the economy works. In other words, their predictions are optimal given what they know, so forecast errors are not systematically biased by the forecasting rule itself. They can be wrong in particular cases due to unforeseen shocks, but on average their predictions align with actual outcomes when information and the model are correctly used.

This fits the idea that agents forecast with full information and model-consistent methods. The other ideas—forecasts always diverging from reality, or people always mispredict policy, or ignoring policy—contradict the notion that forecasts are informed and structurally coherent with how the economy operates.