Your Roommate Is Having Trouble Grasping How Monetary Policy Works

question 178

Multiple Choice

Your roommate is having trouble grasping how monetary policy works.Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply

• A)lowers the interest rate,and firms increase investment spending.
• B)causes people to spend more because they know prices will rise in the future.
• C)raises the interest rate and consumers decrease spending on durable goods.
• D)lowers the interest rate,raises the value of the dollar,lowers the prices of exports,and raises net exports.

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Definitions:

Overconfidence Effect

A cognitive bias where an individual's subjective confidence in their judgements is reliably greater than their objective accuracy, especially when confidence is relatively high.

Judgments

Legal decisions made by a court regarding the rights and liabilities of parties in a legal action or proceeding.

Opinions

Opinions are personal beliefs or judgments that are not necessarily based on fact or knowledge.

Hindsight Bias

The tendency to believe, after an outcome is already known, that one would have foreseen it, often referred to as the "I-knew-it-all-along" effect.