Systematic overestimation or underestimation of inflation will
A) occur under rational expectations but not under adaptive expectations.
B) occur under adaptive expectations but not under rational expectations.
C) occur under both rational and adaptive expectations.
D) not occur under either rational or adaptive expectations.

Question

Quizplus · Accepted Answer

Under adaptive expectations, people form their expectations of future inflation based on past inflation rates, which can lead to systematic errors if inflation changes unexpectedly. Rational expectations, however, assume that people use all available information efficiently, so systematic errors are less likely.

Systematic Overestimation or Underestimation of Inflation Will