Rational Expectations

Rational Expectations is suggests that the current expectations in the economy are equivalent to what people think the future state of the economy will become. It is an economic idea that the people can quite correctly predict future conditions and take actions accordingly, even if they do not fully understand the cause-and-effect relationships underlying the events and their own thinking. It is ensure internal consistency in aggregate stochastic models. It is often used to explain expected rates of inflation and also explains how producers and suppliers use past events to predict future business operations.