If the Fed Shifts to a More Restrictive Monetary Policy

question 105

Multiple Choice

If the Fed shifts to a more restrictive monetary policy in order to help control inflation, the policy shift will generally

• A) stimulate aggregate demand and real output as soon as the policy is instituted.
• B) reduce aggregate demand immediately and quickly bring the inflation under control.
• C) reduce aggregate demand and help bring the inflation under control, but the primary effects may not be felt for several months (or quarters).
• D) lower real interest rates in the short run, but in the long run, real interest rates will rise.

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Definitions:

Bond

A fixed-income instrument that represents a loan made by an investor to a borrower, typically corporate or governmental, which includes terms regarding the interest rate and when the loaned funds (bond principal) must be paid back (maturity).

Effective EAR

The Effective Annual Rate is the actual return on an investment, taking into account the effect of compounding interest.

Par Value

The nominal or face value of a bond, stock, or coupon as stated by the issuer, which is often used to calculate interest payments.

Annual Coupon Payments

The fixed interest payments made by a bond issuer to the bondholders at regular intervals over the life of the bond.