Author Question: You have a 500 saving bond. The nominal interest rate is 10 percent, and the inflation rate is 4 ... (Read 41 times)

panfilo · **on:** Jun 30, 2018

You have a 500 saving bond. The nominal interest rate is 10 percent, and the inflation rate is 4 percent. After a year, in real terms you have earned

A) 70. B) 40. C) 50. D) 510. E) 30.

Question 2

Consumption has fallen substantially in Techland due to pessimism among households. What will be the outcome if a contractionary monetary policy is adopted during this period?

What will be an ideal response?

Cnarkel · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

E

Answer to Question 2

If a contractionary monetary policy is adopted during this period, consumption and investment will fall further. This is because a fall in money supply will lead to a fall in the aggregate price level. If output prices fall, firms will reduce production and lay off workers. As a result, consumption will fall. Investment will also fall if the government adopts a contractionary monetary policy because a decrease in money supply will lead to an increase in interest rates.