Rational expectations shape economic behavior from "summary" of EBOOK: Macroeconomics by Rudiger Dornbusch,Stanley Fischer,Richard Startz
The concept of rational expectations plays a crucial role in shaping economic behavior. Rational expectations theory posits that individuals form their expectations about the future based on all available information, including past experiences and current economic conditions. This means that individuals make predictions about future economic outcomes that are as accurate as possible given the information they have.
When individuals hold rational expectations, they are more likely to make decisions that are in line with economic theory. For example, if individuals believe that inflation will increase in the future, they may adjust their behavior by demanding higher wages to compensate for the expected rise in prices. This, in turn, can lead to an actual increase in inflation as businesses pass...
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