Differentiate between adaptive expectations and rational expectations. Explain why the shape of the Phillips curve changes when we introduce expectations in our analysis.

Adaptive expectations and rational expectations are two different theories of how individuals form their expectations about future economic events. These theories play a crucial role in shaping macroeconomic policies and understanding how people make decisions that affect the economy.

Adaptive expectations is a theory of expectation formation that suggests individuals form their expectations based on past experiences. In other words, individuals form their expectations about the future based on what has happened in the past. This means that if an individual experienced high inflation in the past, they are likely to expect high inflation in the future. This theory suggests that people are slow to update their expectations even if the current economic conditions change.

Adaptive expectations theory was first introduced by John F. Muth in 1961. He argued that expectations are not formed through a rational process, but rather through a learning process. This means that individuals do not have complete information about the economy, and they form their expectations based on the information they have at their disposal. The expectations are updated over time as individuals receive new information.

One of the limitations of adaptive expectations is that it assumes individuals have limited cognitive _________ _____ _____ ____ ________ ______.
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