Suppose the Inflation Rate of a Country Falls from 8

question 69

Multiple Choice

Suppose the inflation rate of a country falls from 8 percent during 2002-2004 to 6 percent in 2005-2007, under the adaptive expectations hypothesis what will the expected rate of inflation at the beginning of 2008?

• A) 2 percent
• B) 4 percent
• C) 6 percent
• D) 8 percent

---

Definitions:

Expected Inflation

The rate at which prices for goods and services are anticipated to rise over a certain period of time.

Factor Model

A financial model that explains different sources of risk and return in an investment portfolio through various factors.

Factor Risk

The risk associated with specific factors that can affect the returns on an investment, such as changes in interest rates, stock market volatility, or inflation.

Nonfactor Risk

Nonfactor Risk, also known as specific or idiosyncratic risk, is the part of an asset's risk that is not correlated with overall market movements and is unsystematic.