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Suppose last year's inflation rate was 5%, but Wall Street analysts expect this year's interest rate to be 4%. Which of the following correctly describes people's beliefs according to rational or adaptive expectations theories?

A.) According to rational expectations, people will anticipate 5% inflation this year.

B.) According to adaptive expectations, people will anticipate 4% inflation this year.

C.) According to rational expectations, people will anticipate 1% inflation this year.

D.) According to adaptive expectations, people will anticipate 1% inflation this year.

E.) None of these answers is correct.

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  1. The answer is E. None of these answers is correct.

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