Applying Contractionary Monetary Policy When the Inflation Rate Is near Zero

question 93

Multiple Choice

Applying contractionary monetary policy when the inflation rate is near zero could cause:

• A) inflation.
• B) stagflation.
• C) deflation.
• D) Monetary policy does not affect prices when the inflation rate is near zero.

---

Definitions:

MM Model

The Modigliani-Miller theorem, proposing that in perfect markets, the value of a firm is unaffected by its capital structure.

Miller Model

A model formulated by Merton Miller, part of the Modigliani-Miller theorem, which discusses the irrelevance of capital structure for a company's market value under certain assumptions.

Corporate Taxes

Taxes imposed on the income or profit of corporations, varying widely by country and affecting companies' net income.

Business Risk

The possibility a company will have lower than anticipated profits or experience a loss rather than taking a profit.