Question Details

How can higher interest rates be anti-inflationary



1. "Years of high growth generally ____ inflation, which in turn prompts the Federal Reserve to _____ interest rates, a step that runs the risk of triggering _____." The blanks are best filled with 
a) fuel; raise; a recession b) reduce; cut; a recession 
c) fuel; lower; inflation d) reduce; raise; inflation 
2. "The Federal Reserve chairman told congress that "the Fed is unlikely to raise interest rates in the near future." He also stated that "a strong signal of inflation pressures has not yet clearly emerged." These statements are 
a) inconsistent because inflation is improperly measured 
b) consistent because the Fed is following the monetarist rule 
c) consistent because higher interest rates are only needed to fight inflation 
d) inconsistent because higher inflation will automatically cause nominal interest rates to rise 
3. "Fans of the new-economy theory say U.S. businesses have become so efficient, and the world so open and competitive, that workers deserve ______ and businesses can't get away with _____. The fluke school argues that temporary factors- low energy prices, a strong dollar, and weak demand in Asia - will eventually go away, causing ______." The blanks are best filled with 
a) wage freezes; layoffs; inflation b) wage increases; raising prices; inflation 
c) to be unemployed; layoffs; unemployment 
d) wage decreases; raising prices; unemployment 
4. "Higher interest rates must boost the cost of all sorts of things for business. How can higher interest rates be anti-inflationary?" Higher interest rates are anti-inflationary because they 
a) lower the price of bonds b) dampen aggregate demand 
c) encourage imports which increases supply of goods and services 
d) are caused by the premium for inflation in nominal interest rates 
5. "Some bankers say Turkey's lax approach to state finances could end in disaster. Inflation last year was 96% and the state is now servicing its debts at a compound interest rate of 123%, a real rate of 27%." Suppose the "world" real interest rate is 3%. The 27% calculation seems to contradict IRP. This is best explained as 
a) Turkey's risk premium is 24% b) Turkey's expected inflation is 120% 
c) IRP is not relevant to this Turkish example 
d) Turkey's expected inflation is much higher than 96%




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