Under the adaptive expectations theory, people persistently
A) underestimate inflation when it is slowing down.
B) overestimate inflation when it is accelerating.
C) underestimate inflation when it is accelerating.
D) adapt to the prevailing inflation rate quickly.

Question

Quizplus · Accepted Answer

According to the adaptive expectations theory, people base their expectations of future inflation on past inflation rates. Therefore, if inflation is accelerating, people will expect it to continue at the same rate or even faster, leading to an underestimation of future inflation. On the other hand, if inflation is slowing down, people will expect it to continue at the same rate or even slower, leading to an overestimation of future inflation. Therefore, the correct choice is C.

Under the Adaptive Expectations Theory, People Persistently