If the actual rate of inflation turns out to be higher than the expected rate of inflation,what happens to the growth rate of output before expectations are updated?
A) The growth rate stays at the Solow growth rate.
B) The growth rate is higher than the Solow growth rate.
C) The growth rate is lower than the Solow growth rate.
D) The growth rate could go up or down.

Question

Quizplus · Accepted Answer

When the actual rate of inflation is higher than expected, it can temporarily boost economic activity as real interest rates are lower than anticipated, encouraging borrowing and investment. This can lead to a growth rate higher than the Solow growth rate until expectations adjust.

If the Actual Rate of Inflation Turns Out to Be