John and Angel are having an argument over future inflation rates. John thinks the rate will be 3%, because inflation has not exceeded that rate in more than a decade. Angel points out that the chairman of the Federal Reserve testified before Congress last week that she thinks the unemployment rate is too far above its natural rate and thus that the economy should be stimulated. John is using _____ expectations and Angel is relying on _____ expectations.

Question

Quizplus · Accepted Answer

John is using adaptive expectations because he is relying on past trends to predict future inflation rates. Angel is using rational expectations because she is taking into account current information from a reliable source (the chairman of the Federal Reserve) to make her prediction.

John and Angel Are Having an Argument Over Future Inflation