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

Question

Quizplus · Accepted Answer

Adaptive expectations theory suggests that people form their expectations of future inflation based on past inflation rates. When inflation decelerates, people tend to overestimate inflation because they are still influenced by the higher past rates.

According to Adaptive Expectations Theory,when Inflation Decelerates