Which of the following statements best describes what it means for the Fed to manage aggregate demand?
A)If real and potential GDP were equal, the Fed would change interest rates even if the rate of inflation equaled the target rate of inflation.
B)The Fed changes interest rates only if the rate of inflation is deviating from the target rate of inflation.
C)If real and potential GDP were not equal, the Fed would change interest rates in order to prevent a deviation between the rate of inflation and the target rate of inflation.
D)The Fed changes interest rates only if the rate of inflation is higher than the target rate of inflation.
E)If real and potential GDP were not equal, the Fed would change interest rates only in those cases that would prevent the rate of inflation from rising above the target rate of inflation.

Question

Quizplus · Accepted Answer

Managing aggregate demand means using monetary policy (such as changing interest rates) to ensure that the economy is operating at equilibrium, where real and potential GDP are equal. If they are not equal, the Fed would change interest rates in order to prevent a deviation between the rate of inflation and the target rate of inflation. This is because the Fed aims to balance the goals of full employment and price stability, and preventing inflation from getting too high is a key aspect of price stability.

Which of the Following Statements Best Describes What It Means