In which case will adaptive, extrapolative and rational expectations predict the same inflation rate in the coming year?
A)Inflation is 4 percent last year, 2 percent this year, and the economist's model predicts 3 percent.
B)Inflation is 4 percent last year, 2 percent this year, and the economist's model predicts 0 percent.
C)Inflation is 3 percent last year, 2 percent this year, and the economist's model predicts 4.5 percent.
D)In none of the options would the predictions be the same.

Question

Quizplus · Accepted Answer

Adaptive, extrapolative, and rational expectations rely on different methods for predicting future inflation, so they are unlikely to predict the same rate unless all conditions align perfectly, which is not the case in any of the given options.

In Which Case Will Adaptive, Extrapolative and Rational Expectations Predict