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:

Inferior Goods

Products whose demand decreases as the income of the consumer increases, contrasting with normal goods.

Substitute Goods

Products or services that can be used in place of one another, satisfying similar needs or desires.

Complementary Goods

are products or services that are used together, where the use or consumption of one increases the demand for the other.

Close-Substitute

A good or service that can easily replace another in satisfying consumer needs, with very little change in consumption patterns.