Assume That Inflation Rates for the Past 5 Years Have

Multiple Choice

Assume that inflation rates for the past 5 years have been 1%, 2%, 2.5%, 2%, 2%. The Federal Reserve announces that it is going to decrease the money supply because it is concerned about inflationary pressures in the economy. If people form their expectations _____, then in light of the Fed's announcement, they will expect an inflation rate of _____.

A) rationally; 2.5%
B) adaptively; 2%
C) adaptively; 1.9%
D) rationally; 4%