To Avoid Deflation, a Central Bank Should

question 18

Multiple Choice

To avoid deflation, a central bank should

• A) decrease the money supply.
• B) decrease inflation.
• C) keep real interest rates below nominal rates.
• D) all of the above

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Definitions:

Forward Exchange Rate

The agreed-upon exchange rate for currencies to be swapped on a specified future date.

Spot Rate

The current market price at which a particular asset, such as currency or commodity, can be bought or sold for immediate delivery.

Discount

A reduction applied to the regular price of goods or services or the amount by which the present value of future cash flows is reduced for discounting purposes.

Foreign Currency

Currency used in a country other than one’s own, representing a medium of exchange for goods and services in that foreign country.