Suppose the Annual Rate of Inflation Has Been 3 Percent

question 135

Multiple Choice

Suppose the annual rate of inflation has been 3 percent and the annual growth rate of the money supply has been 5 percent during the last few years. In the last twelve months, however, the monetary authorities have increased the money supply at a 12 percent annual rate. The expected inflation rate for the next period will be:

• A) lower than 3 percent under both the adaptive and rational expectations hypotheses.
• B) 3 percent under the adaptive expectations hypothesis.
• C) 3 percent under the rational expectations hypothesis.
• D) higher than 3 percent under both the adaptive and rational expectations hypotheses.

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Definitions:

Human Capital Investment

The process of increasing the value of a workforce through education, training, and health improvements.

Technologies

The application of scientific knowledge for practical purposes, especially in industry and everyday life.

Resource Endowments

The natural resources, capital, and human skills that a country or region possess, which can influence its economic development and trade patterns.

IACs

Industrialized Advanced Countries, a term sometimes used to refer to economically developed countries with high levels of industrialization.