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?
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.
You might also like to view...
Which of the following is an accurate statement concerning rent controls?
a. Decreases in rent are allowed, but not increases. b. Rents often fluctuate during the tenure of an occupant. c. Rents are fixed even though cost of living might increase. d. Small annual increases are allowed because of cost of living.
Compare the real cost of commodity resources today (circa 2009) with their cost in the 1845–1850 period. What explains the change?
What will be an ideal response?
The marginal propensity to save is found by dividing ___________ by ________.
Fill in the blank(s) with the appropriate word(s).
The principle that "as one input increases while the other inputs are held fixed, output increases at a decreasing rate" is known as the
A) marginal principle. B) principle of diminishing returns. C) principle of opportunity cost. D) spillover principle.