If Initially $\vec { M }$ = 5 $\vec { v }$

question 164

Multiple Choice

If initially, $\vec { M }$ = 5%, $\vec { v }$ = 3%, $\vec { P }$ = 2%,and $\vec { Y } _ { R }$ = 6% and then because of economic uncertainty $\vec { v }$ falls to 1%,what should the Fed do?

• A) Quietly raise
• \(\vec{ Y } _ { R }\) to 8% to offset the decrease in
• \(\vec { v }\) .
• B) Publicly lower
• \(\vec{ M }\) to 3% so that
• \(\vec{ M }\) -
• \(\vec { v }\) stays constant at 2%.
• C) Publicly demonstrate a commitment to keep
• \(\vec{ M }\) +
• \(\vec { v }\) at 8% by raising
• \(\vec{ M }\) .
• D) Quietly raise
• \(\vec{ M }\) without telling anyone,as only unexpected inflation is expansionary.

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Definitions:

Junk Bonds

High-yield bonds with a lower credit rating than investment-grade bonds, reflecting a higher risk of default.

Industrial-Development Bond

A government-issued bond to support the development of industrial projects, often tax-exempt for the buyer.

Revenue Bond

A type of municipal bond supported by the revenue from a specific project or source, rather than general tax revenues.

General-Obligation Bond

A type of municipal bond that is secured by the full faith and credit of the issuing government, including its taxing power to repay the bondholders.