A theme that dominates modern discussions of macro policy is the importance of expectations, and economists have paid much attention to expectations and economics. Changing expectations can shift the aggregate demand (AD) curve; inflation expectations can cause inflation. For this reason, expectations are central to all political discussions, and what people believe the policy will be significantly influences the effectiveness of the policy. Expectations greatly complicate models and decision making; they change the focus of discussions from an answer that can be captured by simple models to much more complicated discussions. Adaptive expectations theory assumes that people form their expectations about future inflation based on previous and present inflation rates and only gradually change their expectations as experience unfolds. In this theory, there is a short-run trade-off between inflation and unemployment that does not exist in the long run. Any attempt to reduce the unemployment rate jumps the natural rate, setting in motion forces that destabilize the Phillips curve and shift it to the right. The rational expectations model was developed by Robert Lucas, it is assumed that rational economic agents make the best possible use of all publicly available information. Before reaching a conclusion, people are assumed to consider all the information available to them, then make informed, rational judgments about what the future holds. This does not mean that any individual's expectations or predictions about the future will be correct. The errors that occur will be distributed randomly, such that the expectations of a large number of people will on average be correct. To illustrate inflation expectations... middle of paper..., monetary and fiscal policy will work in different ways. People aren't stupid and they aren't super smart; they are people. If the government uses activist monetary and fiscal policy in a predictable way, people will eventually incorporate that expectation into their behavior. If the government bases its prediction of policy effects on past experience, that prediction will likely be wrong. But the government never knows when expectations will change. Let's consider an example. Suppose everyone expects the government to adopt an expansionary fiscal policy if the economy is in recession. In the absence of an expected policy response from the government, people will lower prices when they see a recession coming. Pending the government's expansionary policy, however, they will not lower the price. Therefore, political expectations can create their own problems.