Suppose the central bank announces that it will permanently increase the inflation rate and there is central bank credibility.With adaptive expectations,expectations of inflation will adjust ________,and with rational expectations,expectations of inflation adjust ________.

Question

Quizplus · Accepted Answer

With adaptive expectations, people adjust their expectations based on past inflation rates, so they adjust slowly. With rational expectations, people use all available information, including the central bank's announcement, to adjust their expectations immediately.

Suppose the Central Bank Announces That It Will Permanently Increase