Question Details

It could backfire and drive rates higher because it could 


1. "Monetary policy, by winning on inflation, is about to confer to the federal government an enormous fiscal dividend." This is because lower inflation means 
a) higher income which means higher tax revenues 
b) lower government spending on goods and services, which reduces the budget deficit 
c) lower nominal interest rates which means less government spending on interest payments, which reduces the budget deficit 
d) the clipping is wrong - there is no connection between monetary policy and the budget deficit 
2. "High interest rates are unquestionably anti-inflationary. Despite this, people no longer believe an increase in interest rates is a sign that inflation is about to be beaten. Quite the opposite. People now take a jump in interest rates as a sign that inflation is about to get worse." This happens because higher interest rates mean that the 
a) demand for money has increased b) Fed has given up fighting inflation 75 
c) the cost of doing business has increased 
d) the expected inflation premium in the nominal interest rate has risen 
3. "Consumer prices rose just 0.1 percent in July from June. While the increase from a year earlier is 2.8 percent, inflation in the last three months is a mere 0.8 percent annualized. As a result, the long bond plunged to a new low of 6.33 percent from 6.63 percent a week earlier. " The long bond plunged because 
a) lower inflation expectations increased the nominal interest rate and decreased the price of bonds 
b) lower inflation expectations decreased the nominal interest rate and increased the price of bonds 
c) higher inflation expectations increased the nominal interest rate and decreased the price of bonds 
d) higher inflation expectations decreased the nominal interest rate and decreased the price of bonds 
4. "The reason for Clinton's caution is obvious: the bond market sent him a signal a month ago that big spending is just not acceptable. In anticipation of Clinton's victory, coupled with talk from the Clinton camp about fresh spending, the sell-off of treasury bonds boosted long-term interest rates to about 7.7 percent from 7.3 percent." Interest rates rose because people think 
a) taxes will rise b) bond prices will rise c) more government bonds will be sold 
d) there will be a big decrease in the money supply 
5. "But she warns that any major attempt to reduce rates for the sole purpose of cutting the federal government's huge interest payments on the public debt would likely backfire and drive rates higher." It could backfire and drive rates higher because it could 
a) create inflation, raising the nominal interest rate 
b) require higher taxes which would push up interest rates 
c) involve open market bond sales which would increase the public debt 
d) create unemployment, reducing taxes and increasing the budget deficit



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