Key Terms

adaptive expectations: the theory that people look at past experience and gradually adapt their beliefs and behavior as circumstances change

expected inflation: a future rate of inflation that consumers and firms build into current decision making

neoclassical perspective: the philosophy that, in the long run, the business cycle will fluctuate around the potential, or full-employment, level of output

physical capital per person: the amount and kind of machinery and equipment available to help a person produce a good or service

rational expectations: the theory that people form the most accurate possible expectations about the future that they can, using all information available to them

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