Question

Suppose the inflation rate has been 6 percent over the past four years. If the Federal Reserve announces an increase in the growth of the money supply, adaptive expectations would predict an inflation rate of 6 percent:

True or False?

Answer 1

The above said fact is True.

Reason:- The rate of money supply and the rate of inflation has always direct relationship between them. When money supply increases, the quantity rate of goods and services will increase with the help of huge investment. Huge investment is possible when interest rate of credit is decreased to certain extent. It will attract all medium level investors to invest for their new business projects. Then the production of goods and services increases with the Real GDP. Purchasing power of the people will increase the spending habits of the consumption. When the Consumption expenditure increases, the demand for the goods and services also increases with desirable effect. We can conclude the fact the federal reserve can announce an increase in the growth of the money supply with the prediction of inflation rate of 6% when its velocity was increased at the same level for the past four years.