Question Details

 Why would the reduction be only temporary 



1. "'The Federal Reserve must be conscious of the limits of its capabilities. We can try to provide a backdrop for stable, sustainable growth, but we cannot iron out every 96 
fluctuation, and attempts to do so could be counterproductive,' Alan Greenspan, the Fed chairman, said." The Fed would provide a backdrop for stable, sustainable growth by 
a) preventing inflation b) fine-tuning monetary policy 
c) keeping the interest rate fixed d) reacting quickly to offset monetary shocks 
2. "This brings us back to the fears of higher interest rates before the market break. These fears are still potent, especially if investors see through the temporary reduction in interest rates made possible by stepping up the rate of creation of the money supply." Why would the reduction be only temporary? 
a) bond prices will eventually move higher 
b) permanently-lower interest rates are impossible 
c) the Fed will reverse its policy once it sees its mistake 
d) inflation expectations would rise, increasing the nominal interest rate 
3. "Many politicians say they favor low interest rates but believe in their hearts that higher rates are necessary to control ......." Complete this clipping. 
a) inflation b) budget deficits c) rising unemployment d) upward-creeping taxes 
4. "The governor of the central bank responded by saying that there is nothing in the experience of any country which would suggest that monetary policy can produce sustainable decreases in unemployment beyond those that can be achieved by maintaining stable prices." This is because such decreases in unemployment 
a) increase real wages too much b) require unacceptably high taxes 
	are obtained by fooling workers 

d) are obtained by shifting the long-run Phillips curve 
5. "The Japanese government made the biggest blunder. Between 1985 and 1989, the Bank of Japan (Japan's Fed) kept interest rates too low." This was a mistake because it 
a) cut growth b) accelerated inflation 
c) created unemployment d) created budget deficits



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