Assume a Central Bank Follows a Rule That Requires It

question 25

Multiple Choice

Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged,then

• A)the central bank would have to raise interest rates which would decrease output.
• B)the central bank would have to raise interest rates which would increase output.
• C)the central bank would have to reduce interest rates which would decrease output.
• D)the central bank would have to reduce interest rates which would increase output.

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Definitions:

Accrual

An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid.

Interest Expense

The amount an entity pays for the use of borrowed funds throughout a certain duration.

Net Cash Flow

The amount of cash generated or used by a company in a given period, calculated as the sum of cash flow from operating, investing, and financing activities.

Contingent Liability

A future financial liability that could emerge based on the result of a particular event.