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Monetary Policy within the IS-LM Framework by Shahdad Naghshpour

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Chapter 9

Rational Expectations Hypothesis

Most economic activities and decisions extend into the future, which makes them either uncertain or risky. Expectations about the future are important in economic decisions. Each individual has to forecast what will happen in the future and how future outcomes will affect their current plans and economic activities. This is true even if individuals have no formal training in forecasting and their level of sophistication or ability is low. Different people have different expectations about the future, which is affected in part by their current situations, needs, and plans.

Nowhere is this concept demonstrated better than in a stock market. The old cliché “buy low sell high” is well known, and it is supposed ...

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