If the Fed Has Discretion to Choose Its Own Policy

question 9

Multiple Choice

If the Fed has discretion to choose its own policy and announces a policy of low inflation, then:

• A) the policymaker is required to make the money supply grow at a low rate.
• B) private economic agents are sure to believe the announcement because it is credible.
• C) private economic actors are likely to discount the policy because the Fed has an incentive to renege on its policy once expectations are formed.
• D) the Fed is certain to renege on its policy once expectations are formed because then it can lower unemployment with minimum inflation.

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Definitions:

Interest Expense

The cost incurred by an entity for borrowed funds, including loans, bonds, or lines of credit.

Bondholders

Individuals or entities that hold bonds issued by corporations, municipalities, or governments and are entitled to receive the bond's interest payments plus the return of the bond's principal upon maturity.

Common Stock

A form of corporate equity ownership, a type of security representing ownership in a corporation, with a claim on a portion of its profits.

Operating Expenses

Costs associated with a company's main operational activities, such as rent, utilities, and payroll.