Question

1. Suppose the economy is producing at potential output. Everything else held constant, if the central bank wants to permanently decrease the inflation rate, it needs to _____ the real interest rate _____.

Select one:

a. lower; permanently

b. lower; temporarily

c. raise; temporarily

d. raise; permanently

2. Noise traders

Select one:

a. trade only when they have inside information.

b. tend to lose money on stock trades, but help to stabilize the market.

c. tend to make higher returns than do "buy-and-hold" investors.

d. create additional risk in the market by increasing price fluctuations.

3. If the Fed desired to reduce the federal funds rate

Select one:

a. it would conduct an open market sale, increasing reserve demand.

b. it would conduct an open market purchase, increasing reserve supply.

c. it would conduct an open market purchase, reducing reserve demand.

d. it would conduct an open market sale, reducing reserve supply.

Answer 1

Answer : 1) The answer is option d.

If aggregate demand decrease then inflation decrease. Aggregate demand decrease if real interest rate increase. So, if the Central Bank want to reduce the inflation rate permanently then the Central Bank have to increase the real interest rate permanently. Hence except option d other options are not correct. Therefore, option d is the correct answer.

2) The answer is option d.

Noise trader increase price fluctuation and higher risk come from noise trader. Because noise trader invest based on feelings. Hence except option d other options are not correct. Therefore, option d is the correct answer.

3) The answer is option b.

Open market purchase increase the reserve supply in the banking system. This decrease the federal fund rate. Hence except option b other options are not correct. Therefore, option b is the correct answer.