Using aggregate demand and aggregate supply, explain what happens in the short run if the Federal Reserve raises interest rates in the economy. Be sure to detail what happens to aggregate demand, the price level, the level of GDP, and unemployment
Assume that the economy is at full employment before the interest rate increase.
An increase in the interest rate will cause aggregate demand to decline. Interest costs are part of the cost of borrowing and as they rise, both firms and households will cut back on spending. This shifts the aggregate demand curve to the left. This lowers equilibrium GDP below potential GDP. As production falls for many firms, they begin to lay off workers, and unemployment rises. The declining demand also lowers the price level. The economy is in recession.
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In today's world, many countries impose tariffs
A) only on imports. B) only on exports. C) on both imports and exports. D) on imports, exports, and nontraded goods.
The use of hospitals today is dominated by
A) the elderly. B) immigrants. C) obstetrical care. D) the wealthy.
When we say that the financial crisis can be viewed as a balance sheet problem, this is descriptive of
A) banks' assets being greater than their liabilities. B) banks possessing assets that are declining in value, resulting in banks approaching insolvency. C) banks having low leverage ratios. D) banks engaging in regulatory capital arbitrage. E) none of the above
In 2013, the income share of the highest quintile was:
A. almost 60 percent. B. 20 percent. C. almost 90 percent. D. 47 percent.