How did adaptive expectations theory revolutionize the way economists think about monetary policy?
A) It taught that monetary policy should follow the Phillips curve model.
B) It implied that monetary policy may not have real effects in the short run.
C) It revealed that monetary policy may not have real effects in the long run.
D) It implied that monetary policy must be expected to provide a stimulus.
E) It taught that monetary policy should develop consistent expectations.

Question

Quizplus · Accepted Answer

The adaptive expectations theory suggested that people adjust their expectations for inflation based on past experiences, rather than relying on the policy announcements of central banks. This means that monetary policy may not have immediate real effects, as people's expectations are not easily swayed by policy changes. This understanding has led to a greater emphasis on the importance of anchoring long-term expectations for inflation through clear communication and consistency in policy.

How Did Adaptive Expectations Theory Revolutionize the Way Economists Think