Suppose most people had anticipated that inflation would be 3% in the coming year because the Fed would increase the money supply by 3%.Instead,the Fed increases the money supply by 5%.In the short run,this would cause actual output to be ________ full-employment output and prices to increase by ________ 3%.
A)above; more than
B)above; less than
C)below; more than
D)below; less than

Question

Quizplus · Accepted Answer

In the short run, if the Fed increases the money supply by more than anticipated (5% instead of the expected 3%), it would typically lead to an increase in actual output above full-employment output due to the stimulative effect on spending and investment. Prices would increase by more than 3% because the actual inflation rate would exceed the anticipated rate, leading to higher than expected price increases.

Suppose Most People Had Anticipated That Inflation Would Be 3