For the last several years, the money supply in the fictitious nation of Maurita
ID: 1255875 • Letter: F
Question
For the last several years, the money supply in the fictitious nation of Mauritania has been rising by 10% annually, and inflation has been running at 8%. The central bank is going to cut growth of the money supply back to 3% annually. Which of the following statements regarding the effects of this action is true, ceteris paribus?
A. According to the quantity theory of money, inflation will be 1% in the next year.
B. According to the quantity theory of money, economic growth will slow down.
C. If the assumption of rational expectations holds, output will fall by 10% in the next year.
D. If the assumption of adaptive expectations holds, there will be no effect on output in the following year.
E. None of the above
Explanation / Answer
D). If the assumption of adaptive expectations holds, there will be no effect on output in the following year.
Explanation:- More money means more inflation but the increase in money supply does not necessarily means an increase in output if the assumption of adaptive expectations holds good.