Suppose That During the Last Five Years the Rate of Inflation

question 91

Multiple Choice

Suppose that during the last five years the rate of inflation was 3 percent each year and the money supply had grown 6 percent annually during the period. However, during the last nine months, the Fed has expanded bank reserves more rapidly and the money supply has been growing at a 12 percent annual rate. As a result, the expected inflation rate for the next period will be

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

---

Definitions:

Classified Balance Sheet

A balance sheet that organizes assets and liabilities into subcategories such as current and long-term.

Financial Statements

Formal records of the financial activities and position of a business, person, or other entity, presented in a structured manner.

Adjusted Trial Balance

A list of all accounts and their balances after adjustments have been made for errors, accruals, and deferrals in the accounting period.

Closing Entries

Journal entries made at the end of an accounting period to transfer temporary account balances to permanent accounts, helping to prepare the books for the next period.