Suppose That Initially Real GDP Equals Potential GDP

question 16

Multiple Choice

Suppose that initially real GDP equals potential GDP. Then an increase in aggregate demand occurs. According to the Taylor rule, the Fed should the federal funds rate by _ government securities in the open market.

• A) lower; buying
• B) raise; selling
• C) lower; selling
• D) raise; buying

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Definitions:

Cash Ratio

A liquidity metric that measures a company's ability to pay off its short-term liabilities with its cash and cash equivalents alone.

Price-Earnings Ratio

The price-earnings ratio (P/E ratio) measures a company's current share price relative to its per-share earnings, used by investors to evaluate the valuation and potential for future earnings growth of a stock.

Earnings Per Share

A company's profit divided by its number of common outstanding shares, serving as an indicator of the company’s profitability.

Shares Outstanding

The total number of shares of stock that have been issued by a company and are currently held by investors, including public shareholders and company insiders.