The Fed can shift the entire SML upward or downward by using monetary policy to change the

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The Fed can shift the entire SML upward or downward by using monetary policy to change the risk-free interest rate on short-term U.S. bonds. When the SML shifts, the average expected rate of return on all assets changes. Because average expected rates of return are inversely related to asset prices, the shift in the SML also will change asset prices.

Therefore, the Federal Reserve’s ability to change short-run interest rates also enables it to change asset prices throughout the economy.

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Economics Principles Problems And Policies

ISBN: 9780073511443

19th Edition

Authors: Campbell Mcconnell ,Stanley Brue ,Sean Flynn

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