According to the theory of rational expectations, errors in predicting inflation will a. tend to be biased downward when inflation is rising, and tend to be biased upward when, inflation is falling. b. tend to be biased upward when inflation is rising, and tend to be biased downward when inflation is falling.  c. be purely random. d. be biased upward more often than not.

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A: Hello. Since your question has multiple sub-parts, we will solve the first three sub-parts for you.…