Elucidate the difference among expected and unexpected inflation also categorize the given expectations as rational, adaptive, or extrapolative.
1. Explain how the distinction between expected and unexpected inflation is important to the distributional effects of inflation.
2. Categorize the expectations described below as rational, adaptive, or extrapolative (each category is reresented once).
a. Economists models are predicting that a rapid increase in the money supply will cause prices to increase in the future, so I'm expecting prices to increase too.
b. The trend for the past three years has been for prices to rise 3% per year, so I'm expecting prices to rise 3% next year.
c.Inflation was 2% last year and 4% this year. I think inflation will be about 3% next year.