Assume That During the Last Several Years,the Annual Rate of Inflation

question 43

Multiple Choice

Assume that during the last several years,the annual rate of inflation was 2 percent and the annual growth rate of the money supply was 6 percent.During the last 12 months,however,the monetary authorities have held the supply of money constant.The expected inflation rate for the next period will be

• A)higher than 2 percent under the rational expectations hypothesis.
• B)2 percent under the adaptive expectations hypothesis.
• C)lower than 2 percent under both the adaptive and rational expectations hypotheses.
• D)higher than 2 percent under both the adaptive and rational expectations hypotheses.

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Definitions:

Demand Creates

The assertion that consumer demand drives the production and supply of goods and services in the market.

Supply of Savings

The total amount of income that households choose to save and not consume, available for investment purposes.

Interest Rates

The cost of borrowing money or the return on savings, typically expressed as a percentage of the principal.

Investment

The activity of allocating resources, usually money, with the expectation of generating an income or profit.