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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 is lower than the Solow growth rate. B. The growth rate is higher than the Solow growth rate. C. The growth rate stays at the Solow growth rate. D. The growth rate could go up or down.

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Answer:

The right answer is option (B)

Explanation:

In this case, the growth rate is higher than the Solow growth rate. When the actual inflation is higher than the expected rate, the borrowing is much cheaper, so people borrow more money that leads to an increase in investment and a substantial decline in savings. The lenders lose the money, and borrowers get all the benefits.

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