If a Price Shock Caused by a Sharp Increase in Oil

question 138

Multiple Choice

If a price shock caused by a sharp increase in oil prices is believed to be temporary, then the Fed will

• A)raise interest rates based on its monetary policy rule.
• B)lower interest rates based on its monetary policy rule.
• C)do nothing.
• D)lower interest rates, but not by as much as it would if the price shock were permanent.
• E)raise interest rates, but not by as much as it would if the price shock were permanent.

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Definitions:

Household

An individual or group of people living together and making joint decisions regarding consumption and finances.

Circular-Flow Diagram

A visualization of the economy that shows how dollars flow through markets among households and firms, highlighting the interactions between product and resource markets.

Factor Market

A factor market is the marketplace where productive resources like labor, capital, and natural resources are bought and sold.

Product Market

A marketplace where finished goods and services are bought and sold.