The Harder the Fed Applies the Brakes of Restrictive Monetary

question 29

Multiple Choice

The harder the Fed applies the brakes of restrictive monetary policy in an attempt to reduce an excessive rate of inflation,

• A) the larger is the resulting gap between actual and potential GDP in the short run.
• B) the tighter is the spiral of recovery as the economy moves quickly toward equilibrium at a lower rate of inflation with a minimum of overshooting.
• C) the wider is the spiral of recovery as the economy more-dramatically overshoots equilibrium on the low side of the long-run rate of inflation.
• D) a and c only.
• E) a and b only.

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Definitions:

Nonsystematic Variance

The portion of an asset's total variance that is attributable to factors unique to that specific asset, as opposed to broader market influences.

Market Index

A metric that measures the performance of a basket of securities intended to represent a particular market or segment of it, like the S&P 500 or NASDAQ.

Treynor-Black Model

A portfolio optimization model that integrates market equilibrium theory with security selection to enhance portfolio performance.

Nonsystematic Risk

The risk associated with an individual asset or company, which can be reduced through diversification, unlike systematic risk.