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:

Real Rate

The expected return rate an investor anticipates, adjusted for inflation.

Semi-Annual Coupon

Describes the interest payment made to bondholders every six months until the bond's maturity date.

Yield To Maturity

The total return anticipated on a bond if it is held until its maturity date, accounting for interest payments and the repayment of the principal.

Market Price

The current cost for engaging in transactions involving assets or services.