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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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