"Preannounced, stable policies to achieve a low and constant money supply growth and a balanced federal budget are therefore the best way to lower the inflation rate." This statement best illustrates the: a. Keynesian theory. b. incomes policy. c. supply-side theory. d. rational expectations theory.

The rational expectations economic theory states that the expectations of the population about how the economy is working, will actually influence the economy in a way that these expectations tend to become a reality.

For example, if people expect that the economy is going to fall into a recession they will try to save money and spend less. Because the population starts to save money and spend less the economy will slip into a recession.

The same applies the other way around, if the population is happy and confident about how the economy is doing, they will increase their spending and keep the economy growing.

We have to remember that almost 70% of the economy is private consumption and any small change in private consumption can lift or sink an economy.