For this question, assume that individuals form expectations of inflation according to the following equation πe_t = θπ_t-1. From 1970 on, the value of θ for this equation

Question

BlackTom AI · Accepted Answer

The correct answer is “increased over time and approached 1” because θ measures how heavily agents weight last period’s inflation when forming expectations.

Relevant concepts: π^e_t = θ π_{t−1} is an adaptive/extrapolative expectation rule. Interpretation of θ:
- θ = 0: agents ignore past inflation and always expect zero inflation (or expect no change).
- 0 < θ < 1: agents partially adjust expectations toward last period’s inflation.
- θ = 1: full extrapolation—expected inflation equals last period’s inflation (perfect persistence).
- θ < 0 or θ = −1 would imply expectations move opposite to last period’s inflation, which is implausible behaviorally or empirically.

Step-by-step reasoning:
1. Write the rule: π^e_t = θ π_{t−1}. If empirical estimates of θ rise over time, forecasts become more dependent on recent realized inflation.
2. Observed macro behavior since the 1970s: episodes of high and persistent inflation (stagflation) increased the apparent persistence of inflation series, and many empirical studies estimate that forecasters placed larger weight on recent inflation in this period.
3. As agents learned from repeated inflation persistence, θ estimates moved upward toward 1, meaning expectations became almost equal to lagged inflation: limit π^e_t → π_{t−1} when θ → 1.

Why the correct answer is correct: increasing θ toward 1 matches both the interpretation of adaptive/extrapolative rules and empirical findings that expectations tracked past inflation more closely post-1970, especially during high-persistence inflation episodes.

Why other options are incorrect:
- “Remained constant at negative one”: implies expectations systematically move opposite to past inflation—unrealistic and unsupported empirically.
- “Decreased over time and approached zero”: would mean agents increasingly ignored past inflation, contrary to evidence of strong persistence in expectations during the period.
- “Remained constant at zero”: inconsistent with people forming nonzero expectations tied to observed inflation.
- “None of the above”: unnecessary because one option matches theory and evidence.

Conclusion: therefore θ increased over time and approached 1, which matches the provided answer.

For this question, assume that individuals form expectations of inflation according to the following equation πe_t = θπ_t-1. From 1970 on, the value of θ for this equation单项选择题

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