Both adaptive expectations and rational expectations are prone to ...

[Frost2351]

Both adaptive expectations and rational expectations are prone to error (a discrepancy between the expectation and the actual experience). In each case, how does error affect the formation of new expectations?
 
  What will be an ideal response?

Question 2

Real interest rates were negative during most of the
 
  A) 1960s.
  B) 1970s.
  C) 1980s.
  D) 1990s.

[AngeliqueG]

Answer to Question 1

With adaptive expectations, the newest information is considered neither more nor less significant than the oldest available data. Rational expectations augment data with one or more hypotheses regarding the underlying mechanisms. Each new discrepancy is an opportunity to assess the accuracy of the presumed mechanisms. Given all available, relevant information, the latest discrepancy might be dismissed as an anomaly to be ignored when forming subsequent expectations. Or, the discrepancy might prompt a revision of hypotheses, such that new expectations are affected profoundly.

Answer to Question 2

B

[Frost2351]

TYSM

[parshano]

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