Why Is It Difficult to Determine Whether Fluctuations in the Target

question 7

Multiple Choice

Why is it difficult to determine whether fluctuations in the target interest rate have led to business cycle fluctuations in the United States,according to the New Keynesian model?

• A) Because the Federal Reserve may change the target interest rate according to economic conditions.
• B) Because the target interest rate is nominal, not real.
• C) Because inflation is not well measured.
• D) Because money is neutral.

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Definitions:

Flexible Budget

A budget designed to adapt in accordance with fluctuations in activity level or volume.

Contribution Margin

The amount by which sales revenue exceeds variable costs of a product, indicating how much contributes to covering fixed costs and generating profit.

Fixed Budget

A budget that is established at the beginning of a period and does not change, regardless of actual performance or outcomes.

Direct Labor Rate

The cost per hour for direct labor, which includes wages of workers who are directly involved in the production of goods.