RULES RATHER THAN DISCRETION 479 consistent ibrium FIG 1.Consistent and optimal equilibrium errors were systematically related to lagged sales, so we will do so. c which used direct measures of expectations and found that foreca ses to this finding are that there may be biases in their measurement of expectations, and these biases are related to lagged sales. This is not implausible, given the subtleness of the expectations concept and the imprecision of survey instruments. Further, even if there were a system atic forecast error in the past, now that the Hirsch and Lovell results are part of agents' information sets, future forecast errors should not be subject to such biases. To complete the model, a theory of policy selection is needed. Here it is assumed that there is some social objective function which rationalizes S(xr, ut) If the rationalization is not perfect, a random term must be introduced into the function, The consistent policy maximizes this function subject to the Phillips curve constraint (5) Figure I depicts some Phillips curves and indifference curves From(5) the Phillips curves are straight lines having slope -2-I and intersecting the vertical axis at xr. For a consistent equilibrium, the indifference curve must be tangent to a Phillips curve at a point along the vertical axis as at point C. Only then are expectations rational and the policy selected