Suppose the Public Expects a 7 Percent Inflation Rate, and Both

question 27

Multiple Choice

Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. Suddenly the Federal Reserve unexpectedly allows the money growth rate to be 4 percent. In the short run, we expect that investment spending by firms will ________ and consumer durable spending will ________.

• A) decrease; decrease
• B) increase; decrease
• C) decrease; increase
• D) increase; increase

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Definitions:

Overhead Applied

The amount of indirect costs allocated to goods and services based on a predetermined rate.