Explain why countries with high and volatile inflation rates are likely to have volatile nominal interest rates.
What will be an ideal response?
Using the Fisher equation (that says the nominal interest rate equals the sum of the real interest rate and the expected rate of inflation), a country where inflation is volatile will have lenders adding a high expected inflation component, thus raising the nominal interest rate. The higher volatility of nominal interest rates is directly the result of the volatility in the inflation rate.
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Should European nations which are not currently using the euro choose to adopt the euro as their currency, these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession
A) contractionary fiscal policy B) expansionary monetary policy C) expansionary fiscal policy D) contractionary monetary policy
Periods of price deflation, such as the Great Depression, are characterized by
A) low nominal rates but high real rates of interest. B) low nominal and real interest rates. C) real rates of interest lower than the nominal rate of interest. D) high nominal and real rates of interest.
The Fed attempts to affect the level of borrowed reserves by
A) changing the discount rate. B) changing legal reserve requirements. C) open market sales. D) open market purchases.
If the price elasticity of demand for a product is equal to 4, a 1 percent increase in price of the product will cause the quantity demanded to _____ by _____ percent
a. increase; 0.25 b. decrease; 0.25 c. increase; 4 d. decrease; 25 e. decrease; 4