If the inflation rate has been 6 percent over the past four years and the Federal Reserve announces an increase in the growth of the money supply, then adaptive expectations theory would predict an inflation rate of 6 percent.

Question

Quizplus · Accepted Answer

According to adaptive expectations theory, individuals base their expectations of future inflation on past inflation rates. In this scenario, if the inflation rate has been 6 percent for the past four years, individuals will expect future inflation rates to continue at 6 percent, even if the Federal Reserve announces an increase in the growth of the money supply.

If the Inflation Rate Has Been 6 Percent Over the Past