Question

Suppose that very significant increases in the money supply are anticipated to result in hyperinflation. As a result, people begin to consider the purchase of property and other commodities. What does this behavior exemplify?

a. New classical behavior of a self-regulating economy.

b. Rational expectation theory that people behave adaptively.

c. Adaptive expectation theory that people behave rationally.

d. Business cycle theory that people behave rationally.

Answer 1

The behavior of investing in property due to anticipated hyperinflation is an example of the b. rational expectation theory, where people act on future expectations using all available information.

Step-by-step explanation:

When individuals anticipate significant increases in the money supply and expect hyperinflation, their tendency to invest in property and other commodities exemplifies the rational expectation theory. This theory suggests that people use all available information to form the most accurate expectations about the future, acting on those expectations even before any changes occur. This behavior, such as paying more for homes because they are expected to rise in value due to potential positive changes in the neighborhood, supports the idea that economic adjustments may happen very quickly as people anticipate future events.