In Which of the Following Situations Would the Fed Conduct

question 88

Multiple Choice

In which of the following situations would the Fed conduct contractionary monetary policy?

• A)The Fed believes that aggregate demand was growing too slowly to keep up with potential GDP.
• B)The Fed fears that unemployment is climbing above the natural rate.
• C)The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.
• D)The Fed is worried that deflation will become a problem.

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Definitions:

Volatility Risk

The risk in the value of options portfolios due to unpredictable changes in the volatility of the underlying asset.

Hedge Ratio

A ratio used to measure the proportion of a position that is hedged or the amount of assets used to hedge a risk exposure.

Dynamic Hedging

Constant updating of hedge positions as market conditions change.

Delta Neutral

The value of the options portfolio is not affected by changes in the value of the underlying asset.