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    Reduction in the Rate of Money Growth

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    I am trying to understand the effects of a reduction in the rate of money growth. In particular in relation to inflation and unemployment in terms of both rational and adaptive expectations.

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    Adaptive expectations means that people make decisions based solely on prior experiences. For example, if inflation is always increasing, people are going to underestimate it. They will assume that it will rise only as fast as it did in prior years. Rational expectations, on the other hand, assumes that people make decisions based on efficient use of all available information, considering for the cost of the information. Since information can be quite costly, expectations can be rational and yet be very inaccurate. For example, the theory predicts that the price of a security will be its expected price plus or minus a certain error. In the case of ...

    Solution Summary

    The effects of reduction in the rate of money growth is determined.