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:

Agency Relationship

A legal and fiduciary bond between two parties where one, the agent, is authorized to act on behalf and represent the interests of the other, the principal.

Terminated

The condition of being brought to an end or concluded, often referring to contracts, employment, or agreements.

Insolvency

The state of being unable to pay debts as they fall due or having liabilities exceed assets.

Principal

The party that an agent’s authority can bind or act on behalf of.