High inflation can spiral out of control when
A)expected inflation increases nominal interest rates,causing the Fed to buy bonds,increasing the money supply and further increasing inflation.
B)expected inflation decreases nominal interest rates,causing the Fed to buy bonds,increasing the money supply and further increasing inflation.
C)expected inflation increases nominal interest rates,causing the Fed to sell bonds,increasing the money supply and further increasing inflation.
D)expected inflation decreases nominal interest rates,causing the Fed to sell bonds,increasing the money supply and further increasing inflation.

Question

Quizplus · Accepted Answer

Expected inflation increases nominal interest rates as lenders demand higher returns to compensate for the decreased purchasing power of money. When the Federal Reserve (Fed) buys bonds in response to these higher rates, it injects more money into the economy. This increase in the money supply can further fuel inflation, creating a potential spiral.

High Inflation Can Spiral Out of Control When