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

Question

Quizplus · Accepted Answer

Adaptive expectations assume that future inflation will be based on past inflation rates. Since the inflation rate has been 6 percent for the past four years, adaptive expectations would predict that future inflation rates will also be around 6 percent, regardless of any changes in the growth of the money supply announced by the Federal Reserve.

Suppose the Inflation Rate Has Been 6 Percent Over the Past