4. Adaptive and Rational Expectationsa. Suppose you are in the Adaptive Expectations world. Using the following valuescalculate the first five forecasts (up to the forecast for inflation in year t+5) ofexpected inflation. The natural rate of inflation is 1%, last year's expectation ofthis year's inflation is 1%, however just this year's realized inflation was 3%.Assume the error adjustment coefficient is equal to 0.8.b. Repeat part (a) except now use a lambda value of 1.1. What is the key differenceyou notice between the evolution of inflation forecasts of part (a) and (b)?c. Suppose you are in the Rational Expectations world. There has been abreakthrough in the semiconductor industry, making future computing bothcheaper and faster for firms. What should happen to the price and quantity in thecorporate bond market? Explain using rational expectations theory.

Given information Natural rate of inflation=1% Last years expected inflation=1% Last years actual…

4. Adaptive and Rational Expectations a. Suppose you are in the Adaptive Expectations world. Using the following values calculate the first five forecasts (up to the forecast for inflation in year t+5) of expected inflation. The natural rate of inflation is 1%, last year's expectation of this year's inflation is 1%, however just this year's realized inflation was 3%. Assume the error adjustment coefficient is equal to 0.8.

4. Adaptive and Rational Expectations a. Suppose you are in the Adaptive Expectations world. Using the following values calculate the first five forecasts (up to the forecast for inflation in year t+5) of expected inflation. The natural rate of inflation is 1%, last year's expectation of this year's inflation is 1%, however just this year's realized inflation was 3%. Assume the error adjustment coefficient is equal to 0.8.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter17: The Trade-off Between Inflation And Unemploy

Section: Chapter Questions

Problem 6DQ

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People are said to have rational expectations if they Select one: a. merely guess at the inflation rate b. assume that this year's inflation rate will be equal to the average inflation rate over the past 10 years O c. use all available information in forming their expectations about inflation O d. assume that this year's inflation rate will be the same as last year's inflation rate
In a decelerating inflation environment (e.g. with inflation rate at 20%, 18%, 14%, .. year after year), using "adaptive inflation expectations" formation, the forecasted future inflation rate is likely to be O systematically biased upward. O systematically biased downward. O always correct. O about correct on average.
1. Are the implications of the rational and adaptive expectations hypotheses different in the short-run? A.No, because under both theories people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. B.Yes, because under adaptive expectations there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the rational expectations implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. C.Yes, because under rational expectations theory there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the adaptive expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. D. No, because under both theories, there is a significant time…
Which of the following situations would lead to actual inflation of 3%? A. future inflation is 1%; output-gap inflation is 0%; supply-shock inflation is 2% B. future inflation is 3%; output-gap inflation is 3%; supply-shock inflation is 3% C. future inflation is 1.5%; output-gap inflation is 1.5%; supply-shock inflation is 3% D. future inflation is 0%; output-gap inflation is 3%; supply-shock inflation is - 3% E. future inflation is 3%; output-gap inflation is 0%; supply-shock inflation is - 3%
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The central bank of the Mushroom Kingdom announces that the federal funds rate will be equal to 5% during the next two years, and after these two years it will fall to 3% for the next eight years. If the inflation rate is expected to be 1% throughout the entirety of this period, what will be the long-run expected real interest rate during these ten years? Select one: a.2.40% b.4.40% inal Exam c.7% d.33% Next page
The text proposes the following model of expected inflation x = (1 - 0) x + 0,-1 What do we know about your process of the formation of expected inflation when 0 = 07 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate. OB. Last year's inflation rate will influence you to revise your estimates for this year's expected rate. OC. Regardless of what inflation was last year, you would expect it to be at the long-run average inflation rate this year. OD. Last year's inflation rate and the long-run average inflation rate have an equal impact on your view of this year's expected rate. What do we know about your process of the formation of expected inflation when 0-17 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate OB. Last year's inflation rate will be the only input for you to revise your estimates for this year's expected rate regardless of…