Question 1

Adaptive expectations are formed ________.

Accepted Answer

A

Question 2

Under what circumstances might it be "rational" to rely on adaptive expectations?

Accepted Answer

Adaptive expectations are based on the past. An adaptive expectation is irrational only if there is reason to believe that it is possible to formulate a better guess. Though one can never be sure that the trends of the past will continue unaltered into the future, it may not be possible -- without undue expense -- to acquire enough information and understanding to justify the conclusion that the known trend will fail to persist. If the known trend has been reliable, there is no obvious reason to doubt its persistence, and there is no inexpensive way to conduct a forward-looking assessment, the adaptive expectation is rational.

Question 3

The "rational expectations revolution" refers to a substantial change in the thinking of ________.

Accepted Answer

The "rational expectations revolution" refers specifically to a change in the thinking of macroeconomists, who began to incorporate the idea that economic agents (such as households and businesses) form their expectations about the future based on all available information, including past experiences and current economic conditions. This challenged the traditional Keynesian view that agents had "adaptive" expectations, meaning they adjusted their expectations based only on their most recent experiences. The rational expectations revolution had significant implications for various areas of macroeconomics, including monetary policy and the Phillips curve. While policy makers and elected officials may have eventually played a role in incorporating these ideas into policy decisions, the revolution is primarily associated with changes in macroeconomic theory.

Question 4

________ rational expectations, ________.

Accepted Answer

Rational expectations refer to the idea that people base their expectations about future economic conditions on all available information. This is a concept that most people have always used in their decision making, but macroeconomists have only recently recognized and incorporated it into economic models.

Question 5

Rational expectations theory suggests that ________.

Accepted Answer

Rational expectations theory suggests that economic agents will not be influenced by a piece of information if that information has already been anticipated. This is because economic agents are assumed to be rational and forward-looking, and will already have incorporated such information into their decision-making processes.

Question 6

Suppose you need an estimate of future inflation (to decide, for example, whether a particular security is a good investment). How might you formulate a rational expectation?

Accepted Answer

The answer of Suppose you need an estimate of future...

Question 7

An economic policy has a decent chance of working as intended, if ________.

Accepted Answer

The answer of An economic policy has a decent chance...

Question 8

The danger in using data to estimate the consequences of a proposed policy is that ________.

Accepted Answer

The danger in using data to estimate the consequences of a proposed policy is that the proposed policy, if implemented, might cause unforeseeable changes in the relationships that were in operation when the data were produced. Therefore, relying solely on data to estimate the consequences of a policy can be risky, as unexpected outcomes may arise that were not predicted by the data.

Question 9

A prediction based on rational expectations ________.

Accepted Answer

While predictions based on rational expectations take all available information into account and are therefore generally more accurate than those based purely on past experience (adaptive expectations), they are not infallible and can still be incorrect.

Question 10

New information ought not to influence economic decision-making if ________.

Accepted Answer

If the new information has already been anticipated, it is already reflected in current market prices and economic decision-making. Therefore, it should not have any additional impact on economic decision-making.

Question 11

The notion that expectations will be identical to optimal forecasts using all available information is known as ________.

Accepted Answer

The notion of rational expectations is that expectations will be formed based on all available information and will be identical to optimal forecasts. This is a key assumption in many macroeconomic models. Adaptive expectations assume that individuals adjust their expectations based on past errors in forecasting, while irrational expectations assume that individuals do not make rational decisions based on available information. Tertiary expectations are not a commonly used term in economics.

Question 12

Assume that prices have risen in a given economy by an average of 5 percent over the last nine years. If consumers base their expectations about future price movements on that knowledge alone their forecasts rely on ________.

Accepted Answer

Consumers basing their expectations on past experiences is known as adaptive expectations. They are not necessarily rational because they do not take into account other factors that could affect future prices. Monetary expectations refer specifically to expectations about changes in the money supply or interest rates, which may impact prices indirectly. Reverse expectations are not a commonly recognized concept in economics.

Question 13

Rational expectations theory suggests that ________.

Accepted Answer

Rational expectations theory suggests that individuals will make optimal decisions based on all available information, including any policy announcements. Therefore, policy announcements can impact behavior, as individuals will adjust their expectations and actions accordingly.

Question 14

Economists use ________ to forecast economic activity and to evaluate policy options.

Accepted Answer

Macroeconometric models use statistical analysis to forecast economic activity and to evaluate the potential impact of policy decisions. Educated guesses and cost-benefit analysis can also be useful tools, but macroeconometric models provide a more objective and data-driven approach to economic analysis. Constrained discretion refers to when policymakers are limited in their ability to make decisions, and is not directly related to economic forecasting or policy evaluation.

Question 15

Both adaptive expectations and rational expectations are prone to error (a discrepancy between the expectation and the actual experience). In each case, how does error affect the formation of new expectations?

Accepted Answer

The answer of Both adaptive expectations and rational expectations are...

Question 16

Robert Lucas spurred the rational expectations revolution in ________.

Accepted Answer

Robert Lucas spurred the rational expectations revolution in the 1970s.

Question 17

If households have information that monetary policy is likely to change in the future, that information will play a role in forming ________.

Accepted Answer

If households have access to information about future changes in monetary policy, they are likely to form their expectations in a rational manner. Rational expectations theory assumes that individuals use all available information to make rational predictions about future economic events. This theory suggests that if individuals have access to relevant information, they will form accurate expectations about future policy changes, which will in turn affect their economic behavior. Therefore, rational expectations are the most appropriate choice in this scenario.

Question 18

Expectations about the future will always be accurate if formed under ________.

Accepted Answer

Expectations about the future, even when formed under theories like rational or adaptive expectations, can never be guaranteed to be always accurate due to the inherent unpredictability of future events and the limitations of any theoretical framework in fully capturing the complexities of real-world dynamics.

Question 19

Forecasts based on the extrapolation of observed trends and relationships are likely to be accurate, if ________.

Accepted Answer

The answer of Forecasts based on the extrapolation of observed...

Question 20

Rational expectations are more accurate than adaptive expectations, ________.

Accepted Answer

Rational expectations assume that individuals have full and complete knowledge of current and future economic conditions, leading to more accurate predictions on average. Adaptive expectations, on the other hand, assume that individuals base their expectations on past events and adjust as new information becomes available, often leading to less accurate predictions. However, there may be situations where policies have changed or there is a significant shift in economic conditions, in which case adaptive expectations may be more accurate in the short term.

Quiz 21: The Role of Expectations in Macroeconomic Policy

Adaptive expectations are formed ________.

Under what circumstances might it be "rational" to rely on adaptive expectations?

The "rational expectations revolution" refers to a substantial change in the thinking of ________.

rational expectations, .

Rational expectations theory suggests that ________.

Suppose you need an estimate of future inflation (to decide, for example, whether a particular security is a good investment). How might you formulate a rational expectation?

An economic policy has a decent chance of working as intended, if ________.

The danger in using data to estimate the consequences of a proposed policy is that ________.

A prediction based on rational expectations ________.

New information ought not to influence economic decision-making if ________.

The notion that expectations will be identical to optimal forecasts using all available information is known as ________.

Assume that prices have risen in a given economy by an average of 5 percent over the last nine years. If consumers base their expectations about future price movements on that knowledge alone their forecasts rely on ________.

Rational expectations theory suggests that ________.

Economists use ________ to forecast economic activity and to evaluate policy options.

Both adaptive expectations and rational expectations are prone to error (a discrepancy between the expectation and the actual experience). In each case, how does error affect the formation of new expectations?

Robert Lucas spurred the rational expectations revolution in ________.

If households have information that monetary policy is likely to change in the future, that information will play a role in forming ________.

Expectations about the future will always be accurate if formed under ________.

Forecasts based on the extrapolation of observed trends and relationships are likely to be accurate, if ________.

Rational expectations are more accurate than adaptive expectations, ________.