If inflation had been 4 percent for four years, but then inflation increased to 8 percent in the past two years, given the adaptive expectations theory, expected inflation in the next year will be closer to

Question

Quizplus · Accepted Answer

According to the adaptive expectations theory, people base their expectations of future inflation on past inflation. In this case, inflation has been at 4 percent for four years, but it has increased to 8 percent in the past two years. This suggests that people may start to expect higher rates of inflation in the future, closer to the recent rate of 8 percent. Therefore, the best choice is option C, 8 percent.

If Inflation Had Been 4 Percent for Four Years, but Then