Adaptive expectations assume that individuals:
A) base predictions on random events (i.e., animal spirits).
B) make predictions based on the past behaviour of the economy.
C) form their predictions of macroeconomic variables randomly.
D) can accurately predict the future.
E) use all available information in predicting the future.

Question

Quizplus · Accepted Answer

Adaptive expectations theory assumes that individuals make predictions based on past behavior of the economy, adjusting their predictions as new information becomes available. It does not assume that individuals can accurately predict the future or that predictions are formed randomly.

Adaptive Expectations Assume That Individuals