Refer to the Graph Shown

question 19

Multiple Choice

Refer to the graph shown. Suppose an economy begins at point B but then adopts a contractionary monetary policy.In the long run, this policy would most likely:

• A)raise inflation to 9 percent, but leave unemployment at 5.5 percent.
• B)lower inflation to 3 percent, but leave unemployment at 5.5 percent.
• C)raise inflation to 9 percent, but lower unemployment to 4 percent.
• D)lower inflation to 3 percent, but raise unemployment to 7.5 percent.

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Definitions:

Coupon Rate

The interest rate paid by fixed-income securities, determined as a percentage of the principal value.

Marginal Tax Rate

The tax rate applicable to the last dollar of an individual's or entity's taxable income.

Cost of Debt

The effective rate that a company pays on its current debt, which can include loans, bonds, and any other interest-bearing liabilities.

Market Risk Premium

The extra return expected by investors for holding a risky market portfolio instead of risk-free assets, reflecting the additional risk.