According to the theory of adaptive expectations, if the inflation rate has been 10 percent for the last ten years, people will expect next year's inflation rate to be
A) 10 percent.
B) higher than 10 percent.
C) lower than 10 percent.
D) whatever the government announces.
E) zero.

Question

Quizplus · Accepted Answer

According to the theory of adaptive expectations, people base their expectations of future events on past experiences. If the inflation rate has been 10 percent for the last ten years, people are likely to expect next year's inflation rate to be the same, i.e. 10 percent. This is because they have not received any new information that would lead them to expect a different outcome. Therefore, choice A) is the best answer.

According to the Theory of Adaptive Expectations, If the Inflation