The adaptive expectations theory suggests that:
A)the price level that people expect in the future is based on the behavior of prices in the past.
B)the unemployment rate adapts immediately to the inflation rate.
C)people have perfect foresight and always predict future price levels correctly.
D)people use all current information available to formulate their inflation expectations.
E)people react spontaneously to price level changes and do not consider any past or present information.

Question

Quizplus · Accepted Answer

The adaptive expectations theory suggests that people form their expectations of future prices based on past prices. Therefore, the price level that people expect in the future is based on the behavior of prices in the past.

The Adaptive Expectations Theory Suggests That