Assume That During the Last Several Years, the Annual Rate

question 2

Multiple Choice

Assume that during the last several years, the annual rate of inflation was 4 percent and the annual growth rate of the money supply was 5 percent. During the last 12 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) higher than 4 percent under the rational expectations hypothesis.
• B) 4 percent under the adaptive expectations hypothesis.
• C) higher than 4 percent under both the adaptive and rational expectations hypotheses.
• D) both a and b.

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