Discuss the concept of "rational expectations" and its implications for economic policymaking, particularly in terms of inflation and employment.

The rational expectations theory asserts that individuals make predictions about the future based on available information and their understanding of economic policy, effectively incorporating the expected effects of current policies into their economic decisions. This concept challenges traditional approaches to fiscal and monetary policy, as it suggests that efforts to manipulate economic outcomes through policy changes may be anticipated by the public, thus neutralizing the intended effects. For example, if people expect inflation to rise due to government action, they may seek higher wages in advance, counteracting the policy’s goals.