Suppose the Annual Rate of Inflation Has Been 3 Percent

question 135

Multiple Choice

Suppose the annual rate of inflation has been 3 percent and the annual growth rate of the money supply has been 5 percent during the last few years. In the last twelve 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) lower than 3 percent under both the adaptive and rational expectations hypotheses.
• B) 3 percent under the adaptive expectations hypothesis.
• C) 3 percent under the rational expectations hypothesis.
• D) higher than 3 percent under both the adaptive and rational expectations hypotheses.

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