The principal power of the central bank

25. “The principal power of the central bank to lower interest rates lies in its ability to contribute to a lower rate of inflation and that takes time.” Lower inflation means lower interest rates becausea) money supply is higher b) money demand is lowerc) expected inflation is lower d) investment demand is lower26. “Bond prices soared and yields plunged after the Labor Department said the producer price index rose by 0.4 percent in March. Although Wall Street had been expecting a rise of only 0.3 percent, the core index, excluding the volatile food and energy sector, rose a slight 0.1 percent against expectations of a 0.3 percent rise.” Bond prices soared because 74a) inflation expectations increased b) inflation expectations decreasedc) yields plunged due to supply of bonds exceeding demand for bondsd) of uncertainties due to irregularities in reporting the monthly price index27. “Although the Fed has been successful in pushing down short-term interest rates to 4 percent, the long bond yield has fallen very little and is still up at 7.5 percent.” The yield on the long bond is higher than on short-term bonds becausea) the demand for long-term bonds must be greater than for short-term bondsb) the Fed must be selling many more long-term bonds than short-term bondsc) long-run inflation expectations must be higher than short-run inflation expectationsd) long-run inflation expectations must be lower than short-run inflation expectations

 

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