Question

Which of the following accurately explain the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations? Check all that apply.
a. Under the adaptive expectations hypothesis, people will integrate the shift to the more expansionary monetary policy into their forecast of the future inflation rate.
b. Under the rational expectations hypothesis, people will not change their expectations until there is an actual increase in the rate of inflation.
c. Under the adaptive expectations hypothesis, people will not change their expectations until there is an actual increase in the rate of inflation.
d. Under the rational expectations hypothesis, people will integrate the shift to the more expansionary monetary policy into their forecast of the future inflation rate.

Answer 1

Answer:

D and B

Explanation:

Rational expectation will include the present as well as the past trend to build the future expectations. So, presence of unexpected expansionary policy, will make them build expectations of the future. But, adaptive expectations relies on the past information. It means that inflation actually happened, when make people to adapt the future expectation.