If the Fed Is Able to Permanently Reduce the Inflation

question 82

Multiple Choice

If the Fed is able to permanently reduce the inflation rate,households will eventually lower their expectation of the inflation rate.Once that happens,the Phillips curve will shift ________,and the Fed can return output to potential GDP by ________ the real interest rate.

• A) up; raising
• B) up; lowering
• C) down; raising
• D) down; lowering

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Definitions:

Pigovian Tax

A tax or charge levied on the production of a product that generates negative externalities. If set correctly, the tax will precisely offset the overallocation (overproduction) generated by the negative externality.

Clean Up

The process of removing contaminants, waste, or undesirable items from an area, thus restoring it to its original or acceptable condition.

Moral Hazard

The situation where one party takes on risk because they know that another party will bear the consequences.

Adverse Selection

A situation in insurance and markets where higher-risk individuals are more likely to select and use insurance or services, potentially leading to market inefficiencies.