Question

Which of the following assumptions best characterized the assumption about how individuals formed expectations of inflation by the early 1970s? a) Rational expectations b) Adaptive expectations c) Irrational expectations d) Static expectations

Answer 1

By the early 1970s, the assumption about how individuals formed expectations of inflation had shifted towards:

b) Adaptive expectations

Adaptive expectations theory suggests that individuals form their expectations of future inflation based on past inflation rates. It assumes that people adjust their expectations over time as they observe actual inflation rates. This view was prevalent until the rational expectations theory gained prominence later.