Average inflation over the past 20 years has been 3%. You know thatinflation 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 eitherreach 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 themiddle of the year, and inflation turns out to be 2%. Is yourprevious expectation still rational?► What if you knew at the beginning of the year that crisis is likely tohappen?

In order to forecast future price changes, rational expectations of inflation are established based…

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?

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?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter22: Inflation

Section: Chapter Questions

Problem 34P: The total price of purchasing a basket of goods in the United Kingdom over four years is: year...

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Que 15: What is inflation targeting?
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