ECON 2035 : Econ 2035 Test 2
Document Summary
Econ 2035 test 2 ch 7, 17, 22, 23. Theory of rational expectations: adaptive expectations- suggest that changes in expectations will occur slowly over times as past data change. Example: if inflations had formerly been steady at a 5% rate, expectations of future inflation would be 5%, too. Example: it takes john 30 min to get to work. People might be aware of all available information but find it takes too much effort to make their expectation the best guess possible. The theory of rational expectations then simply says: (xe = xof: x equals the optimal forecast using all variable information, rationale behind the theory. Two come sense implications for forming expectations that are important in the analysis of the both the stock market and the aggregate economy. If there is a change in the way a variable moves, the way in which expectations of this variable are formed will change as well.
