Rational expectations theory is an economic concept that suggests individuals make decisions based on their expectations of the future, using all available information. This means that people anticipate the effects of economic policies and events, adjusting their behavior accordingly. As a result, the actual outcomes often align with these expectations, making it difficult for policymakers to influence the economy through traditional means. The theory was developed in the 1970s by economists like Robert Lucas, who argued that if people can predict the future accurately, then systematic government interventions may be ineffective. This has implications for understanding monetary policy and fiscal policy, as it emphasizes the importance of credibility and transparency in economic decision-making.