Question

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economics would say that expectation formation is:________.A) irrational.B) rational.C) adaptive.D) reasonable.

Answer 1

Option C

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economics would say that expectation formation is:  adaptive.

Explanation:

Adaptive expectations hypothesis implies that investors will modify their expectations of future behavior based on current prior behavior. In finance, this impact can effect people to produce investment decisions based on the way of contemporary historical data, such as stock price activity or inflation rates, and modify the data to prophesy future exercise or rates.  

If the market has been trending downward, people will possible expect it to proceed to trend that way because that is what it has been acting in the recent past.