Suppose the Public Expects a 7 Percent Inflation Rate, and Both

Multiple Choice

Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. Suddenly the Federal Reserve unexpectedly allows the money growth rate to be 4 percent. In the short run, we expect that investment spending by firms will ________ and consumer durable spending will ________.

A) decrease; decrease
B) increase; decrease
C) decrease; increase
D) increase; increase