Suppose the inflation rate rate has been 8% per year for the past couple of year

Question

Suppose the inflation rate rate has been 8% per year for the past couple of years. This year, the central bank announces and follows through with a drastic decrease in the money supply. Which of the following is true? a. An individual with adaptive expectations should expect the inflation rate to be lower than 8%. b. An individual with rational expectations should expect the inflation rate to be higher than 8% c. An individual with adaptive expectations should expect the inflation rate to be higher than 8%. d. An individual with rational expectations should expect the inflation rate to remain at 8% e. An individual with rational expectations should expect the inflation rate to be lower than 8%

Explanation / Answer

c. An individual with adaptive expectations should expect the inflation rate to be higher than 8%.

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