Whats is your rational expectation of the inflation rate next year? Imagine there is an unexpected shock that hits the economy in the middle of the year, and inflation turns out to be 2%. Is your previous expectation still rational? What if you knew at the beginning of the year that crisis is likely to happen?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Average inflation over the past 20 years has been 3%. You know that
inflation is usually 1% above average at the business cycle peaks and 1%
below average during crisis.
At the beginning of the year, you don't expect the economy to either
reach the peak or get into crisis.
► Whats is your rational expectation of the inflation rate next year?
Imagine there is an unexpected shock that hits the economy in the
middle of the year, and inflation turns out to be 2%. Is your
previous expectation still rational?
► What if you knew at the beginning of the year that crisis is likely to
happen?
Transcribed Image Text:Average inflation over the past 20 years has been 3%. You know that inflation is usually 1% above average at the business cycle peaks and 1% below average during crisis. At the beginning of the year, you don't expect the economy to either reach the peak or get into crisis. ► Whats is your rational expectation of the inflation rate next year? Imagine there is an unexpected shock that hits the economy in the middle of the year, and inflation turns out to be 2%. Is your previous expectation still rational? ► What if you knew at the beginning of the year that crisis is likely to happen?
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