An Unanticipated Shift to a More Restrictive Monetary Policy by the Fed

question 45

Multiple Choice

An unanticipated shift to a more restrictive monetary policy by the Fed will

• A) increase real interest rates and, thereby, reduce investment, current consumption, and aggregate demand.
• B) reduce real interest rates, leading to a depreciation of the dollar and an expansion in net exports and aggregate demand.
• C) increase real interest rates, leading to higher asset prices that will stimulate aggregate demand.
• D) reduce real interest rates and, thereby, stimulate investment, current consumption, and aggregate demand.

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Definitions:

Dependency Exemption

A tax deduction for taxpayers who support dependents, significantly reduced with the Tax Cuts and Jobs Act of 2017.

Support

In tax terms, support refers to the financial assistance provided for the maintenance of a person, often considered in dependency exemptions.

Life Insurance Premiums

The payments made to an insurance company in exchange for life insurance coverage, which can sometimes be tax-deductible.

Standard Deduction

A fixed amount that reduces the income subject to tax, available to taxpayers who do not itemize deductions.