Under the adaptive expectations hypothesis, which of the following is the most likely long-run effect of a move to a more expansionary monetary policy?
A) higher prices and no change in real output
B) higher prices and expansion in real output
C) no change in prices but an expansion in real output
D) no change in either prices or real output

Question

Quizplus · Accepted Answer

According to the adaptive expectations hypothesis, people's expectations about inflation are based on past experiences. Therefore, if the central bank moves to a more expansionary monetary policy and increases the money supply, people will eventually expect higher inflation rates. As a result, prices will rise in the long run, but there will be no change in real output.

Under the Adaptive Expectations Hypothesis, Which of the Following Is