Under what circumstances might it be rational to rely on adaptive ...

[big1devin]

Under what circumstances might it be rational to rely on adaptive expectations?
 
  What will be an ideal response?

Question 2

According to the permanent-income hypothesis,
 
  A) the present value of lifetime consumption equals the present value of lifetime income.
  B) the income earned in a lifetime will be evenly divided between consumption and saving.
  C) household consumption depends on income that households expect to receive each year, and financial markets are used to smooth consumption in response to changes in transitory income.
  D) households use financial markets to transfer funds from periods when income is high to periods when income is low.

[poopface]

Answer to Question 1

Adaptive expectations are based on the past. An adaptive expectation is irrational only if there is reason to believe that it is possible to formulate a better guess. Though one can never be sure that the trends of the past will continue unaltered into the future, it may not be possible  without undue expense  to acquire enough information and understanding to justify the conclusion that the known trend will fail to persist. If the known trend has been reliable, there is no obvious reason to doubt its persistence, and there is no inexpensive way to conduct a forward-looking assessment, the adaptive expectation is rational.

Answer to Question 2

C

[big1devin]

YES! Correct, THANKS for helping me on my review

[bigcheese9]

Wow, this really help