. In some countries the central bank expands the money supply during presidentia

Question

. In some countries the central bank expands the money supply during presidential elections to stimulate the economy and help the party in power. Assume the central bank of Kubikistan normally increases inflation by 4% each election year.

a. How would this impact the economy in terms of output and employment if citizens of Kubikistan expected 0% inflation.

Output (up, down, stay the same):_________________

Employment (up, down, stay the same):_________________

b. How would this impact the economy if citizens formed their expectations adaptively?

Output (up, down, stay the same):_________________

Employment (up, down, stay the same):_________________

c. How would this impact the economy if citizens formed their expectations rationally?

Output (up, down, stay the same):_________________

Employment (up, down, stay the same):_________________

Explanation / Answer

if 0 % inflation rate is expected then.

a. )The intrest rate effect real intrset ratr , which in turn effect demand and ultimately output , employment and inflation are related to it . Wages and prices will start to increase and output will also decrease

b.) employment will be down as price will rise and there wil be less buyer and product will not sell in market and surely the manufactiring sector will be running in loss and theer will be no emloyment oppurtunity

I f the citizen form their expaction adaptively ,

Output will be based same , there will be no effect in all , initially thefre will be decrease but it will reach the saturation and no change will occur

Employment will also remaun same

If the citizen chhose ratioanlly

there will increase in Otput as well as employment

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