Suppose the Economy Is Initially Operating at the Natural Level

question 30

Multiple Choice

Suppose the economy is initially operating at the natural level of output. Now, suppose the central bank raises the inflation target by 2.5%. Given this information, we would expect that:

• A) the nominal interest rate will increase by more than 2.5% in the medium run.
• B) the nominal interest rate will increase by exactly 2.5% in the medium run.
• C) the nominal interest rate will fall by exactly 2.5% in the medium run.
• D) the nominal interest rate will fall by less than 2.5% in the medium run.
• E) the nominal interest rate will not change in the medium.

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Definitions:

Perfected Interest

A legal claim or lien that has been formally established to secure priority over other claims concerning the same asset or property.

Repossession

The process by which a creditor takes back property from the borrower, due to failure to make required payments.

Security Interest

A legal claim or right granted in an asset as collateral to ensure the fulfilment of an obligation, typically repayment of a loan.

Legal Remedy

The means through which a court of law enforces a right, imposes a penalty, or makes another court order to impose its will.