Use the Following to Answer Questions

question 280

Multiple Choice

Use the following to answer questions:
Figure: Monetary Policy I
-(Figure: Monetary Policy I) Refer to Figure: Monetary Policy I. If the economy is initially in equilibrium at E₂ and the central bank chooses to sell Treasury bills_____ shift to _____ a(n) _____ gap.

• A) AD₂ will; the right, causing; inflationary
• B) AD₂ will; AD₁, causing; recessionary
• C) AD₁ will; AD₂, closing; recessionary
• D) AD₁ will; the left, increasing; recessionary

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Definitions:

Market Risk Premium

The extra profit an investor is aiming for by choosing to invest in a market portfolio that carries risk instead of opting for assets devoid of any risk.

Government Bond

A type of investment where an investor loans money to a government in exchange for periodic interest payments plus the return of the bond's face value at maturity.

Treasury Bill

A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less.