To Prevent Inflation from Becoming Permanently Higher Following an Adverse

question 2

Multiple Choice

To prevent inflation from becoming permanently higher following an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____.

• A)lower the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
• B)raise the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
• C)maintain the inflation rate target; maintain the real interest rate target
• D)maintain the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run

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Definitions:

Variable Costs

Expenses that vary directly with the amount of production or business operations.

Fixed Costs

Expenses that do not change in total amount with changes in the level of business activity or production volumes, such as rent, salaries, and insurance.

Unit Variable Cost

The cost associated with producing one unit of output, including labor, materials, and overhead, that varies directly with the level of production.

Fixed Manufacturing Costs

Costs that do not vary with the level of production output, such as rent, salaries, and insurance.