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Suppose the Fed eases monetary policy and, as a result, market participants increase their long-run inflation expectations. Based on the Friedman effect combined with the

Suppose the Fed eases monetary policy and, as a result, market participants increase their long-run inflation expectations. Based on the Friedman effect combined with the pure expectations hypothesis regarding the term structure, one would expect to see short-term rates ________ long-term rates.

  • A. increase more than

  • B. increase the same amount as

  • C. decrease less than

  • D. decrease the same amount as

  • E. decrease more than

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