Rational Expectations Theory

-It states that businesses, consumers, and workers understand how government policies will affect the economy and anticipate the impacts in their own decision making. In other words, everyone knows what’s going to happen and they plan for it.
-For example, when the government begins some expansionary polices, workers will anticipate that a result will be higher inflation which would cause a decrease in their real wages. So, the workers quickly ask for more money for their nominal wage. If things work out well, there will be no temporary increases in profit, output, or unemployment.
-They also say that policies designed to push unemployment below its natural rate will quickly increase the rate of inflation, having no effect on unemployment.