Question

If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is :______

a. more than 10%.


b. 5%.


c. 10%.


d. between 5 and 10%.

Answer 1

When the Federal Reserve announces that the new rate of monetary growth will be 10% and everything else is held constant, the adaptive expectation forecast of the inflation rate is more than 10%.

Step-by-step explanation:

When the Federal Reserve announces that the new rate of monetary growth will be 10% and everything else is held constant, the adaptive expectation forecast of the inflation rate would be more than 10%. Adaptive expectations refer to the theory that individuals base their expectations of future inflation on past inflation rates, and they adjust their expectations gradually over time. Given that the average rate of monetary growth and inflation in the past decade have been 5%, if the new rate of monetary growth is 10%, individuals would expect a higher inflation rate than before.