Ch 31 1. Over the past five years, you have recorded the inflation rate to be 3 percent, 4 percent, 3 percent, 4 percent, and 3 percent, respectively. According to rational expectations theory, what would market participants expect inflation to be next year, and why? 2. Consider this excerpt from the textbook: "From 1929 to 1933, prior to the establishment of federal deposit insurance, over 9,000 banks failed in the United States. Because of these bank failures people began holding their money outside the banking system. This action contributed to a significant contraction in the money supply... .After peaking at $676 billion in 1931, the M2 money supply fell to just $564 billion in 1933. This drastic decline was one of the major causes of the Great Depression." Looking back on the Great Depression, what do most economists believe the Federal Reserve should have done to try to limit the negative effects of the Depression? Because you are an economics student, your parents are always asking you about the macroeconomy. Over the past few months, they have seen the economy expanding at a very fast pace, and they are worried about inflation. Your parents ask you, "What type of monetary policy do you expect the Federal Reserve to conduct if it expected high levels of inflation on the horizon?" Explain your answer 3