Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?
A)The economy will enter into a recession.
B)The level of economic activity will increase.
C)The actual inflation rate will rise.
D)The federal funds rate will fall.

Question

Which of the following is likely to happen if people expect the inflation rate to be high and the central bank follows a tight monetary policy?​
A)The economy will enter into a recession.
B)​The level of economic activity will increase.
C)The actual inflation rate will rise.
D)The federal funds rate will fall.

Quizplus · Accepted Answer

If people expect the inflation rate to be high, it means they anticipate prices to rise. If the central bank follows a tight monetary policy, it means they are reducing the money supply, which will cause interest rates to rise. As a result, borrowing becomes more expensive and spending will decrease. This leads to a reduction in economic growth and a possible recession.

Which of the Following Is Likely to Happen If People