According to the Theory of Rational Expectations, If the Fed

question 36

Multiple Choice

According to the theory of rational expectations, if the Fed uses open market operations to increase the supply of loanable funds, the ultimate effect on interest rates

• A) is a reduction in interest rates.
• B) is an increase in interest rates.
• C) is no effect on interest rates.
• D) cannot be determined.

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Definitions:

Information Surprises

Events or news that were unexpected by market participants, often leading to sudden changes in asset prices.

Nondiversifiable Risk

The portion of investment risk that cannot be eliminated through diversification, attributed to market factors affecting all investments.

Inflation

The upward movement in the general price index of goods and services, which diminishes the purchasing ability.

Total Return

The overall financial gain or loss on an investment over a specific period, including dividends, interest, and capital gains.