According to the adaptive expectations hypothesis,
A) inflation will cause the long-run unemployment rate to decline.
B) the economic record during the current period strongly influences decision-maker expectations about the future.
C) decision makers will consider the expected impact of policy changes when forming their expectations about the future rate of inflation.
D) future inflation will adapt to conform with the expectations of decision makers.

Question

Quizplus · Accepted Answer

The adaptive expectations hypothesis suggests that decision makers form their expectations about the future based on their experience with economic conditions during the current period. Therefore, the economic record during the current period strongly influences decision-maker expectations about the future. Option A is incorrect because the hypothesis does not suggest that inflation will cause the long-run unemployment rate to decline. Option C is partially correct, as decision makers will consider the expected impact of policy changes, but this is not the primary factor that forms their expectations about the future rate of inflation. Option D is also incorrect because the hypothesis suggests that future inflation will adapt to conform with the expectations of decision makers, not the other way around.

According to the Adaptive Expectations Hypothesis