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. The Federal Reserve decides to keep the the money growth rate to be 7 percent. In the short run, we expect that investment spending by firms will ________ and consumer durable spending will ________.

A) increase; decrease
B) decrease; increase
C) increase; increase
D) None of the above; there will be no change in the level of investment spending by firms and consumer durable spending by households.