Question

According to the adaptive expectations theory, you are likely to underestimate inflation when the price level is increasing at a_____________ rate and to overestimate inflation when price level is increasing at a___________rate.
a. Increasing
b. Decreasing
c. Constant

Answer 1

Answer: increasing

Explanation:

Adaptive expectations hypothesis is a theory which states that economic agents such as the individuals, firms and the government will look at past events and experiences to make adjustments on future expectations.

According to the theory, one is likely to underestimate inflation when the price level is increasing at an increasing rate and to overestimate inflation when price level is increasing at an increasing rate.