Suppose That During the Last Five Years the Rate of Inflation

Multiple Choice

Suppose that during the last five years the rate of inflation was 3 percent each year and the money supply had grown 6 percent annually during the period. However, during the last nine months, the Fed has expanded bank reserves more rapidly and the money supply has been growing at a 12 percent annual rate. As a result, the expected inflation rate for the next period will be

A) higher than 3 percent under the rational expectations hypothesis.
B) 3 percent under the adaptive expectations hypothesis.
C) higher than 3 percent under both the adaptive and rational expectations hypotheses.
D) both a and b.