Question: In the past, some people believed that the Federal Reserve routinely expanded the money supply during presidential election years in order to stimulate the economy and help the incumbent president. For this question, assume that the Fed increases inflation by 3% in every election year.
a. Describe the effect on the economy during election years if market participants expect 0% inflation.
b. Describe the effect on the economy during election years if expectations are formed adaptively.
c. Describe the effect on the economy during election years if expectations are formed rationally.