Problem 8

Rational Expectations: The theory of Rational expectations holds that people form the most accurate possible expectations about

the future that they can, using all information available to them. In an economy where most people have rational

expectations, economic adjustments may happen very quickly.

 

Adaptive Expectations: Here, they look at past experience and gradually adapt their beliefs and behavior as circumstances change, but are not perfect synthesizers of information and accurate predictors of the future in the sense of rational expectations theory.