According to adaptive expectations theory,when inflation accelerates,
A) people underestimate inflation.
B) people overestimate inflation.
C) people correctly estimate inflation.
D) people change to rational expectations.
E) unemployment must increase.

Question

Quizplus · Accepted Answer

Adaptive expectations theory suggests that people form their expectations of future inflation based on past inflation rates. When inflation accelerates, they tend to underestimate it because they rely on past data, which does not immediately reflect the new higher rate of inflation.

According to Adaptive Expectations Theory,when Inflation Accelerates