The problem with the traditional macroeconomic treatment of expectations of inflation is that
A) the model is not consistent with the microeconomic assumption that individuals are rational, forward-looking people.
B) the model assumes that individuals will merely guess at what the inflation rate will be.
C) in the model people always assume that inflation will be zero.
D) the way people formulate expectations in that model assumes that individuals are highly sophisticated in their economic thinking.

Question

Quizplus · Accepted Answer

The traditional macroeconomic treatment of expectations of inflation assumes that individuals form their expectations based on past data alone, without considering their rationality or forward-looking behavior. This is inconsistent with the microeconomic assumption that individuals are forward-looking, rational decision-makers, which makes the model flawed.

The Problem with the Traditional Macroeconomic Treatment of Expectations of Inflation