The proponents of adaptive expectations believe that
A) there will be a substantial time lag before people anticipate the effects of a shift to a more expansionary macro-policy.
B) macro-policies that stimulate demand and place upward pressure on the general level of prices will temporarily increase output and employment.
C) discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.
D) all of the above are true.

Question

Quizplus · Accepted Answer

Adaptive expectations theory suggests that people form expectations about future economic conditions based on past experiences. Therefore, they will not immediately adjust their expectations in response to a change in macro-policy. This means that there will be a time lag before people anticipate the effects of a shift to a more expansionary macro-policy. Additionally, adaptive expectations theory suggests that macro-policies that stimulate demand and place upward pressure on the general level of prices will temporarily increase output and employment. However, it does not suggest that discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.

The Proponents of Adaptive Expectations Believe That