Refer to the Diagram

question 120

Multiple Choice

Refer to the diagram. Assume that the natural rate of unemployment is 5 percent and that the economy is initially operating at point a, where the expected and actual rates of inflation are each 6
Percent. In the long run, the decline in the actual rate of inflation from 6 percent to 4 percent will

• A) reduce the unemployment rate.
• B) reduce corporate profits in real terms.
• C) have no effect on the unemployment rate.
• D) reduce real domestic output.

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Definitions:

Relevant Risk

The portion of an investment's risk that cannot be eliminated through diversification, related to factors affecting the market as a whole.

Hurdle Rate

The minimum rate of return on an investment that is required by a manager or investor to proceed with the investment.

Risk-Free Rate

The theoretical return on an investment with no risk of financial loss, often represented by the yield on government securities.

Expected Market Rate

The anticipated return on investment in the financial markets based on historical data and market analysis.