If the Federal Reserve Announces That Its Target for the Federal

question 53

Multiple Choice

If the Federal Reserve announces that its target for the federal funds rate is rising from 4 percent to 4.25 percent,how do you expect workers and firms to react?

• A)As long as the Fed's announcement is credible,workers and firms will increase their consumption and investment spending,which will increase aggregate demand and inflation.
• B)As long as the Fed's announcement is credible,workers and firms will reduce their consumption and investment spending,which will reduce aggregate demand and reduce inflation.
• C)If the Fed's announcement is not credible,workers and firms will not expect inflation to fall so they will reduce their consumption and investment spending,which will increase aggregate demand and reduce inflation.
• D)Workers and firms will incorporate the increase in interest rates into their expectations of inflation,and they will expect inflation to rise as a result of Fed's policy announcement.

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Definitions:

Government Budget

A financial statement presenting the government's projected revenue and expenditure for a specific period.

National Saving

The total amount of savings generated within a country, which includes both private savings by households and businesses, and public savings from government budgets.

Mutual Funds

Investment programs funded by shareholders that trade in diversified holdings and are managed by professionals.

Investment Charges

Fees and expenses associated with investing in various types of investment vehicles, like mutual funds or stocks.