3. Inflation Assume the CPI for Year 1 is equal to 236 and the CPI for Year 2 28

Question

3. Inflation Assume the CPI for Year 1 is equal to 236 and the CPI for Year 2 283. What is the consumer inflation rate between Year 1 and Year 2? A. 19.9% B. 16.6% ?. 0.20% D,-0.17% 4. Monetary Policy Which of the following options are tools for the Fed to engage in expansionary monetary policy? A. Buy government securities, decrease the discount rate, decrease the reserve requirements. B. Buy government securities, increase the discount rate, decrease the reserve requirements. C.Sell government securities, decrease the discount rate, decrease the reserve requirements. D. Sell government securities, increase the discount rate, increase the reserve requirement

Explanation / Answer

Question 3

CPI in Year 1 = 236

CPI in Year 2 = 283

Calculate the inflation rate between Year 1 and Year 2 -

Inflation rate = [(CPI in Year 2 - CPI in Year 1)/CPI in Year 1] * 100

Inflation rate = [(283 - 236)/236] * 100

Inflation rate = 19.9%

Thus,

The inflation rate is 19.9%

Hence, the correct answer is the option (A).

Question 4

Fed administer monetary policy to smoothen out the economic fluctuations.

When Fed engages in expansionary monetary policy, it takes following steps -

1. Fed undertakes open market operations in terms of buying government securities.

2. Fed lowers the discount rate.

3. Fed reduces the reserve requirement.

Hence, the correct answer is the option (A).

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