Suppose the inflation rate of a country falls from 8 percent during 2002-2004 to 6 percent in 2005-2007, under the adaptive expectations hypothesis what will the expected rate of inflation at the beginning of 2008?
A) 2 percent
B) 4 percent
C) 6 percent
D) 8 percent

Question

Quizplus · Accepted Answer

Under the adaptive expectations hypothesis, people form their expectations of future inflation based on past inflation rates. Since the inflation rate was 6 percent in the most recent period (2005-2007), people would expect it to continue at 6 percent at the beginning of 2008.

Suppose the Inflation Rate of a Country Falls from 8