According to the theory of adaptive expectations, if the inflation rate has been 4.2 percent for the last ten years, people will expect next year's inflation rate to be:
A)4.2 percent.
B)higher than 4.2 percent.
C)lower than 4.2 percent.
D)0;that is, they will expect no inflation.
E)8.4 percent.

Question

Quizplus · Accepted Answer

According to adaptive expectations theory, people base their expectations of future inflation on past inflation rates. If inflation has been consistently at 4.2 percent for the last ten years, people will expect next year's inflation rate to be 4.2 percent as well. This is because they have adapted to the trend of inflation being at 4.2 percent and will assume that it will continue in the future. Therefore, option A is the best choice.

According to the Theory of Adaptive Expectations, If the Inflation