The United States was on a gold standard from 1879 to 1914.
During that period, the average inflation rate was about zero. Inflation was sometimes positive and sometimes negative, and there was no relation between inflation in one year and the next. Each year, inflation was equally likely to be positive or negative, regardless of past inflation.
a. For the gold-standard era, is the assumption of adaptive expectations a good one? If not, what assumption about inflation expectations would be more reasonable?
b. Write the Phillips curve for the alternative assumption about expectations.
c. Suppose the real interest rate rises temporarily, as in Figure. Compare the effects on inflation under adaptive expectations and under the alternative assumption in parts (a) and (b).
