Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Let's reenact a simplified version of the 1981–1982 Volcker disinflation. Expected inflation and actual inflation are both 10%, real growth is 3%, and to keep it simple assume that velocity growth is zero. Thus, we have AD: Money growth = inflation + real growth. Now let's define a simple SRAS curve: Inflation = expected inflation + 1 × (real growth rate – Solow growth rate). How fast did the money supply grow at this point, before Volcker started fighting inflation?
10%
7%
3%
None of the answers is correct.
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