How Does Adaptive and Rational Expectation and Phillips Curve Work?

Imagine you and your friend are playing a guessing game where you try to guess how many candies are in a jar, but every time you make a guess, you learn something new about the jar.

Adaptive expectations is like when you guess based on what happened last time. If there were 20 candies last time, you might think this time it's also around 20. You're using past clues to help you guess now, just like learning from your mistakes.

Rational expectations, though, is like when you use all the information you have, maybe you count how many candies are visible through a little window on the jar, or you remember that your friend usually adds 5 candies every time. You're making the best guess you can with everything you know, like solving a puzzle.

Now imagine the Phillips Curve is like the relationship between how many candies you get and how hard you have to work to win them. Sometimes, if people expect more candies, they might work harder or try smarter tricks, just like when you know there's a surprise candy inside, you might guess more carefully!

Together, these ideas help explain how people make predictions and how those predictions can affect what happens next, just like in your guessing game!