From an Initial Long-Run Equilibrium with Zero Nominal Demand Growth,nominal

question 174

Multiple Choice

From an initial long-run equilibrium with zero nominal demand growth,nominal GDP growth rises to a permanent 9 percent.If we assume adaptive expectations with a one-period lag,the dynamic process in response to the demand growth is

• A)a loop that eventually terminates at Y = 100 with 9 percent inflation.
• B)a loop that eventually terminates at Y = 100 with zero percent inflation.
• C)a straight path to the northeast until we reach Y = 109 with 9 percent inflation.
• D)in the first period Y = 109 with zero inflation,and every period thereafter Y =100 with 9 percent inflation.