If the Fed Responds to an Initial Increase in Aggregate

question 314

Multiple Choice

If the Fed responds to an initial increase in aggregate demand by increasing the quantity of money,

• A) there will be no inflationary gap.
• B) real GDP will begin to decrease more rapidly than if the quantity of money had remained constant.
• C) money wages will fall to reduce the unemployment.
• D) there is the risk of continued inflation.

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Definitions:

Anchoring and Adjustment Heuristic

A mental shortcut that influences the way people intuitively assess probabilities and make decisions based on initial information.

Escalation of Commitment

The phenomenon of investing increasingly more resources into a failing course of action due to cognitive biases and sunk costs.

Confirmation Bias

The tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses.

Representation Bias

Representation bias refers to the cognitive bias where individuals inaccurately assess the probability of an event based on the ease with which examples come to mind, often due to how frequently they are portrayed or mentioned.