According to adaptive expectations theory,people underestimate inflation when
A) it slows down.
B) they anticipate it.
C) it accelerates.
D) it is unexpected.
E) their expectations change.

Question

Quizplus · Accepted Answer

According to adaptive expectations theory, people gradually adjust their inflation expectations based on past experiences. Therefore, when inflation accelerates, people underestimate it because their expectations have not adjusted quickly enough to the current inflation rate. When inflation slows down or they anticipate it, their expectations will more closely match the actual inflation rate. If inflation is unexpected or their expectations change, it can also impact their estimates, but this is not a consistent pattern predicted by the theory.

According to Adaptive Expectations Theory,people Underestimate Inflation When