Suppose That the Federal Reserve Is Expected to Expand the Quantity

question 172

Multiple Choice

Suppose that the Federal Reserve is expected to expand the quantity of money by 5 percent but ends up expanding it by only 2 percent.If the new Keynesian theory is correct,which of the following describes the effect on the economy?

• A) The economy experience a boom because the quantity of money is still growing.
• B) Inflation will be higher than expected.
• C) Workers' decisions about when to work will be affected.
• D) A recession will ensue.

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Definitions:

Elasticity

A measure of how much the quantity demanded or supplied of a good or service changes in response to changes in price, income, or other factors.

Income Elasticity

A measure of how much the demand for a good changes in response to a change in consumers' income.

Quantity Demanded

The overall volume of a specific good or service that consumers intend and have the means to acquire at a given price.