About question 1: I need to do an econ review, but I thought inflation and interest rates move in step. Ie, if the inflation rises, then so do interest rates. This would imply a,b is wrong (because inflation will increase in expansionary policy), and D is correct. Is this correct? What am I missing here, is it because we are talking about “real” interest rates, or is my basic assumption wrong?
my opinion is that you are not considering short term effects on short term more money will increase supply of funds so interest rates go down after that inflation starts to rise and interest rates need to follow
ok thanks for that. sounds like my assumption is right, but that the decrease of interest rates happens in the near-short term, and inflation-interest rate increases happen in the late short term, if I have it correctly.
Could someone explain why B for q 2? Thanks. I am going with D. They “adapt” to increase in inflation forecast by "assuming’ future inflation will accelerate. Any thoughts?
Ans for both questions is B 2) According to AE Hypothesis, actual rate of inflation experienced in the recent past would be the major determinant of the expected future rate of inflation