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.

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Definitions:

Frontal

Pertaining to the front part of something, especially the frontal lobe of the brain, which is involved in decision making and voluntary movement.

Pleasure Centre

An area of the brain, such as the nucleus accumbens, that is associated with the sensation of pleasure in response to certain stimuli.

Hypothalamus

A region of the brain that regulates bodily functions, including hunger, thirst, temperature, and the sleep-wake cycle.

Brainstem

The part of the brain connecting the spinal cord to the forebrain and cerebrum, responsible for basic life functions such as breathing and heart rate.