If the Fed Wanted to Stimulate the Economy to Limit

question 52

Multiple Choice

If the Fed wanted to stimulate the economy to limit the effects of a recessionary gap, then it should__________ the federal funds rate in order to__________ the real interest rate and thereby__________ investment.

• A) lower; lower; decrease
• B) lower; raise; increase
• C) raise; raise; decrease
• D) lower; lower; increase

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Definitions:

Residual Income

A measure of the excess profit that exceeds the required rate of return on investment.

Required Rate Of Return

The minimum return an investor expects to achieve by investing in a particular asset, reflecting the risk level of the investment.

Combined ROI

A measure of the total return on investment from multiple investments or projects, combined into one metric.

Investment Opportunity

An item or asset obtained with the intention of producing income or increasing in value.