The correct options are B). when inflation is increasing from year to year, people tend to overestimate inflation, D), Monetary policy can reduce unemployment only if the policy is expected and E). when inflation is decreasing from year to year, people tend to underestimate the inflation.
Adaptive expectation is an economic theory that gives the importance to the past events for the predictions of the future outcomes.
Solution:-
Year Actual Inflation rate Expected Inflation rate Error
2016 3% 3% 0%
2017 5.00% 3% 2.00%
2018 6.50% 5.00% 1.50%
2019 4.50% 6.50% 2.00%
2020 3.50% 5.50% 2.00%
Adaptive expectation states that if inflation increased in the past year, people will expect higher rate of inflation in the next year.
Learn more about the adaptive expectations here:-
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