When Output Falls or the Foreign Rate of Interest Rises

question 108

Multiple Choice

When output falls or the foreign rate of interest rises, what must the central bank do and why?

• A) It must sell foreign currency reserves for its own currency to raise rates of interest and decrease the supply of money.
• B) It must buy foreign currency reserves with its own currency to lower rates of interest and increase the supply of money.
• C) It must resist the temptation to do something immediately and let the situation work itself out.
• D) It must ask the domestic government to issue more bonds to raise domestic rates of interest.

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Definitions:

Mass

A measure of the amount of matter in an object, a fundamental property that affects the object's inertia and gravitational interaction.

Density

The mass per unit volume of a substance, often noted in grams per cubic centimeter or kilograms per cubic meter.

Volume

The capacity of a container measured by the space a substance or object can fill.

Metal

A class of elements characterized by their ability to conduct electricity and heat, and which, in general, possess a shiny appearance.