According to adaptive expectations theory,if the last three years of inflation were 3%,3%,and 2%,respectively,one would expect inflation the following year to be:
A) 0%.
B) 3%.
C) 1%.
D) 4%.
E) 2%.

Question

Quizplus · Accepted Answer

Adaptive expectations theory suggests that people form their expectations of future inflation based on past inflation rates. Given the last three years of inflation were 3%, 3%, and 2%, the most recent rate (2%) would heavily influence expectations, leading to an expectation of 2% inflation for the following year.

According to Adaptive Expectations Theory,if the Last Three Years of Inflation