When Interest Rates Are near Zero and Traditional Monetary Policy

question 99

Multiple Choice

When interest rates are near zero and traditional monetary policy is ineffective, the Fed or other central bank may resort to a strategy referred to as quantitative easing. What does this strategy involve?

• A) allowing interest rates to rise slowly by providing substantial reserves for as long as is necessary to avoid inflation
• B) reducing the money supply to raise the interest rates slowly without discouraging spending
• C) keeping interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation and encourage spending
• D) increasing the money supply and interest rates at a constant rate to stimulate economic activity

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Definitions:

Marginal Cost

The additional cost of producing one more unit of a good or service.

Competitive Labor Market

A market where numerous employers are actively seeking to hire and numerous individuals are seeking employment, with wages determined by the supply and demand for labor.

Wage Rate

The amount of compensation paid to an employee per unit of time worked, often expressed per hour or year.

MV

MV, short for "Mean Value," is a measure used in statistics and mathematics to denote the average or central value of a set of numbers.