To Prevent Inflation from Becoming Permanently Higher Following an Adverse

question 2

Multiple Choice

To prevent inflation from becoming permanently higher following an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____.

• A)lower the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
• B)raise the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
• C)maintain the inflation rate target; maintain the real interest rate target
• D)maintain the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run

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Definitions:

Well-Organized Markets

Financial markets characterized by high levels of efficiency, transparency, liquidity, and regulation, facilitating fair and orderly trading and pricing of securities.

Efficient Markets

A hypothesis suggesting that financial markets are "informationally efficient," meaning prices of securities reflect all available information at any moment.

Expected Risk Premium

The extra return investors require to hold a risky asset over a risk-free asset, reflecting the additional risk.