The Central Bank of Substantia Uses a Price Level Target

question 3

Multiple Choice

The central bank of Substantia uses a price level target to conduct monetary policy. In the current year, a shock has lowered the inflation rate from 1.5% to 1.0%. Following the shock, firms and households can expect an inflation rate of

• A)1.0%.
• B)1.5%.
• C)2.0%.
• D)2.5%.

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Definitions:

Downward Counterfactual Thinking

The mental process of imagining worse alternatives to events that have already occurred, often leading to feelings of relief or contentment.

Illusion Of Control

A cognitive bias that leads individuals to overestimate their ability to control events.

Gambler's Fallacy

The incorrect belief that past random events can influence the likelihood of future random events, especially in the context of gambling.

Illusory Correlation

Recognizing a link between two variables where there is none in reality.