If firms and households form their expectations about inflation by looking at past inflation,this form of expectations formation is known as ________ expectations.
A)adaptive
B)forward-looking
C)rational
D)perfect

Question

Quizplus · Accepted Answer

Adaptive expectations are formed by looking at past data to predict future trends. In the case of inflation, if firms and households base their expectations on past inflation rates, this would fall under the category of adaptive expectations. Forward-looking expectations, on the other hand, involve analyzing current data and future trends to form expectations. Rational and perfect expectations involve more sophisticated methods of expectations formation, such as optimizing behavior based on economic models or perfect knowledge of future events.

If Firms and Households Form Their Expectations About Inflation by Looking