For the last several years the money supply in the fictitiou

For the last several years, the money supply in the fictitious nation of Mauritania has been rising by 10% annually, and inflation has been running at 8%. The central bank is going to cut growth of the money supply back to 3% annually. Which of the following statements regarding the effects of this action is true, ceteris paribus?

A. According to the quantity theory of money, inflation will be 1% in the next year.

B. According to the quantity theory of money, economic growth will slow down.

C. If the assumption of rational expectations holds, output will fall by 10% in the next year.

D. If the assumption of adaptive expectations holds, there will be no effect on output in the following year.

E. None of the above

Solution

D). If the assumption of adaptive expectations holds, there will be no effect on output in the following year.

Explanation:- More money means more inflation but the increase in money supply does not necessarily means an increase in output if the assumption of adaptive expectations holds good.