An unannounced increase in the money supply will increase both prices and real GDP under
A) neither rational nor adaptive expectations.
B) rational but not adaptive expectations.
C) adaptive but not rational expectations.
D) both adaptive and rational expectations.

Question

Quizplus · Accepted Answer

With both adaptive and rational expectations, individuals will adjust their behavior and take into account the increased money supply, leading to an increase in spending and ultimately increasing both prices and real GDP. With only rational expectations, individuals would immediately anticipate the increase in money supply and adjust their behavior accordingly, while under only adaptive expectations, it may take longer for individuals to adjust their behavior leading to a delayed increase in prices and real GDP. Under neither rational nor adaptive expectations, individuals would not adjust their behavior and there would be no increase in prices or real GDP.

An Unannounced Increase in the Money Supply Will Increase Both