An Increase in the Discount Rate Would Be an Example

question 42

Multiple Choice

An increase in the discount rate would be an example of

• A)expansionary fiscal policy.
• B)expansionary monetary policy.
• C)contractionary fiscal policy.
• D)contractionary monetary policy.

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Definitions:

Absolute Purchasing Power Parity

The theory that, in the absence of transaction costs and other barriers, identical goods in different countries should have the same price when expressed in a common currency.

Transaction Costs

The expenses incurred when buying or selling goods and services, which may include commissions, fees, and the bid-ask spread.

Covered Interest Arbitrage

An investment strategy that involves exchanging domestic currency for a foreign currency, investing in foreign interest-bearing assets, and using forward contracts to hedge exchange rate risk.

Forward Contract

A special arrangement made between two parties to transact an asset at a pre-agreed price on a set date in the future.