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

Phillips curve

the tradeoff between unemployment and inflation

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