Rational expectations is an economic theory suggesting that individuals make decisions based on their best forecasts of future events, using all available information. This means that people do not simply react to past trends but also consider how policies or changes might affect the economy in the future. In this framework, if a government implements a new policy, individuals will adjust their behavior based on their expectations of the policy's impact. For example, if they believe that a tax cut will lead to higher inflation, they may spend less now, anticipating that prices will rise later.