Then there was a revolution and rational (typically forward-looking) expectations were widely adopted, realizing that people are not stupid and will try to use the available information, including what other agents may do, to figure out what the future holds. What is the primary difference between the innate and adaptive responses? For example, adaptive price expectation means that agent revises his expectation of future price taking into account difference between his former expectations of current price and the actual current price. What is the difference between rational expectations and adaptive expectations? Differentiate between Rational and Adaptive Expectations and clearly explain their role in focusing on future macro-economic variables 1. Rational Expectations The theory of rational expectations was first proposed by John F. Muth of Indiana University in the early 1960s. We investigate the mechanism of expectation formation in two different contexts: first, where the fundamental value is constant; second, where the fundamental price increases over repetitions. The difference between adaptive expectations and rational expectations. Differentiate between Rational and Adaptive Expectations and clearly explain their role in focusing on future macro-economic variables 1. If the central bank wants to reduce the inflation target in conditions where expectations are formed adaptively, it will increase interest rates to reduce output below the stabilising rate so that inflation expectations are pushed lower. There was a time where macroeconomics was ruled by adaptive (or backward-looking) expectations, like the much-ridiculed chartists. Theory 3 # Adaptive Expectations: Yet another approach to expectations formation, which can also be viewed as a special case of the extrapolative hypothesis has come to dominate much of the work done on expectations. a. b. Which is a key difference between a rational expectations perspective and an adaptive expectations perspective? The backward nature of expectation formulation and the resultant systematic errors made by agents (see Cobweb model) was unsatisfactory to economists such as John Muth, who was pivotal in the development of an alternative model of how expectations are formed, called rational expectations. ... 1.1 Expectations in Macroeconomics Modern economic theory recognizes that the central difference between economics and natural sciences lies in the forward-looking decisions made by economic agents. This is the adaptive expectations hypothesis, first put … c. The adaptive response generates immunological memory and is more specific than the innate response. The innate response does not distinguish between pathogens, while the adaptive response does. Only the innate response is triggered by antigens. Rational Expectations The theory of rational expectations was first proposed by John F. Muth of Indiana University in the early 1960s. d. a. Adaptive Expectations, Rational Expectations, and Learning in Macroeconomic Models.