Monetary Policy in Highland

question 256

Multiple Choice

Monetary Policy in Highland
Highland has had inflation of 15% for many years. Highland establishes a new central bank, the Bank of Highland, with the hopes of reducing the inflation rate.
-Refer to Monetary Policy in Highland. The Bank of Highland reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct?

• A)Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3.
• B)Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 1.
• C)Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 3.
• D)Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 1.

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Definitions:

Warrants

Securities that grant the holder the right to purchase the company's stock at a predetermined price before a specified date.

Implicit Call Option

A feature embedded in certain financial instruments or contracts that gives the issuer the right, but not the obligation, to take some action under specified conditions.

Loan Guarantees

Agreements in which a third party (the guarantor) agrees to repay the debt or perform an obligation if the debtor defaults.

Implicit Call Option

An option embedded in an investment that gives the holder the right but not the obligation to undertake certain actions under specific conditions.