Suppose We Know the Following Information About a Hypothetical Economy

question 69

Multiple Choice

Suppose we know the following information about a hypothetical economy: -real GDP = $485 billion
-potential GDP = $500 billion
-inflation rate = 4%
-target overnight interest rate = 6%
If the central bank implements a contractionary monetary policy in an effort to reduce the inflation rate,the short-run effect of this policy is likely to be that

• A)unemployment will rise further beyond the NAIRU.
• B)unemployment will fall below NAIRU.
• C)the interest rate and the inflation rate will both rise and unemployment will fall.
• D)the interest rate and the inflation rate will both fall and unemployment will rise.
• E)all real variables will remain unchanged.

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Definitions:

Establish

To set up, found, or create an organization, system, or set of rules.

Dual Federalism

A political arrangement in which power is divided between the federal and state governments in clearly defined terms, with state governments exercising those powers accorded to them without interference from the federal government.

Federal Government

The national government of a federated state, which shares sovereignty with the constituent states or provinces and possesses certain powers delegated to it by a constitution.

State Governments

The governing bodies of individual states within a federal system, responsible for local legislation and administration.