Suppose the Fed announced a policy of rapid growth in the money supply in 2015, but then put the brakes on money expansion without any announcement. If in 2016, Fed officials announce again that an expansion is planned, it is most likely that _____
A) people will believe in the announcement since the conditions that created a need for the expansion are probably still in effect.
B) people will believe in the announcement since they expect the Fed to implement the expansionary policy, despite not doing so in the past.
C) people will not believe in the announcement since they reason that the conditions that created a need for the expansion must have changed in the meantime.
D) people will believe in the announcement because an expansionary monetary policy is easier to implement than a contractionary monetary policy.
E) there will be further uncertainty about the Fed following through on the policies it announces.

Question

Quizplus · Accepted Answer

Because of the Fed's past behavior of announcing expansionary policies but then failing to follow through on them, there will likely be increased uncertainty about whether or not the Fed will actually implement the planned expansion in 2016. This uncertainty could be due to a variety of factors, including shifts in economic conditions or changes in the political climate. Therefore, it is difficult to predict how people will respond to the announcement in 2016.

Suppose the Fed Announced a Policy of Rapid Growth in the Money