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:

Absorption

The process in cost accounting of allocating all manufacturing costs, both fixed and variable, to individual units of production.

Variable Costing

A costing method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs, used for internal decision-making processes.

Net Operating Income

The net profit of a company, calculated by deducting operating expenses from the gross profit.

Absorption Costing

A financial recording strategy that encompasses all costs related to production, such as raw materials, labor directly associated with the production, and all overhead expenses, whether they vary or are fixed, as part of a product's cost.