rational expectations theory

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Rational Expectations theory undergirds economic models. As all models must make certain assumptions in order to be practical, the question is whether the models this assumption generates are close enough to reality to be useful. Expectations are "rational" if they make efficient use of all available information, considering for the cost of the information. Since information can be quite costly, expectations can be rational and yet be very inaccurate. For example, the theory predicts that the price of a security will be its expected price plus or ...