When the Economy Is Hit by a Negative Demand Shock

question 55

Multiple Choice

When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level,then

• A)inflation will be lower.
• B)output will be at its potential.
• C)output will be lower.
• D)inflation will be unchanged.
• E)both B and D.

---

Definitions:

Duration

A measure of the average life of a bond, defined as the weighted average of the times until each payment is made, with weights proportional to the present value of the payment.

Bond

A fixed income instrument that represents a loan made by an investor to a borrower, typically corporate or governmental.

Zero-Coupon Bond

A bond paying no coupons that sells at a discount and provides only payment of face value at maturity.

Discount Rate

The interest rate used to discount future cash flows to their present values, often used in investment appraisal and risk assessment.