... have rational expectations that people look to the future and do the best job they can in predicting it. Economists work with many scenarios for how managers, workers, and investors go about forecasting the future and forming their expectations. The main formulations about expected inflation are static expectations, regressive expectations adaptive expectations and rational expectations. This essay sticks mainly to comparing and contrasting the behaviour of the economy in which people have rational expectations and adaptive expectations. THE ROLE OF EXPECTATIONS The stability of the macro economy depends critically upon the expectations of decision makers concerning future macroeconomic conditions, i.e., the loci of the aggregate demand and supply curves. The economy can remain stable only as long as decision-makers' expectations match actual conditions fairly closely, i.e., when there are no surprises. Two recently emerging economic theories shed light on the lack of predictability of public policy makers. The major hypotheses in economists ...

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