The issue can be illustrated with the aid of Figures 3.4 and 3.5, which show the paths of the price level and the expectational errors that are made under, respectively, the REH and the AEH. The diagrams were produced as follows. First, the computer was instructed to draw 100 (quasi-) random numbers from a normal distribution with mean zero and variance a 2 = 0.01. These random numbers are the

(3.8)

in turn. The first term is s that constant itself. The

:nt, so that Et_iPte = P.

owledge concerning the final expectation of it D. As a result of all these 65