The Federal Reserve increases interest rates when it wants to reduce aggregate demand to fight inflation. How do increases in the interest rate reduce aggregate demand?
What will be an ideal response?
Increases in interest rates reduce planned investment. The decrease in investment reduces equilibrium output by a multiple amount due to the multiplier effect. Also, increases in interest rates increase the value of the dollar, reducing net exports, which reduce aggregate demand and equilibrium output by a multiple amount.
You might also like to view...
Unemployment is a ________ concept, measuring the ________
A) stock; number of people who are not working B) stock; number of people at a point in time who are not working but who are looking for work C) flow; number of people who are first entering the labor force D) flow; number of people who lost their jobs within the last week
In a three-player game, if the game is symmetric and one player does not have a dominant strategy, then the other two players also have no dominant strategy
Indicate whether the statement is true or false
When the Chinese government buys U.S. government bonds, from the perspective of China, this is a(n):
A. export. B. import. C. capital outflow. D. capital inflow.
Based on the information in the table, which product would be an inferior good?Product% Change in Income% Change in Quantity DemandedA-10-10B+5+5C-3+3D-3-3
A. Products A and D B. Product B C. Product C D. Product D only