Suppose the public expects a 4 percent inflation rate, while the Federal Reserve unexpectedly allows the money growth rate to be 5 percent. In the short run, we expect that investment spending by firms will ________ and consumer durable spending will ________.
A) decrease; decrease
B) increase; decrease
C) decrease; increase
D) increase; increase

Question

Quizplus · Accepted Answer

When the actual inflation rate exceeds the expected inflation rate due to an unexpected increase in the money growth rate, it typically leads to lower real interest rates in the short run. Lower real interest rates make borrowing cheaper, encouraging firms to invest more and consumers to spend more on durable goods.

Suppose the Public Expects a 4 Percent Inflation Rate, While