If the Fed believes that real GDP is above potential GDP, it will
A)raise interest rates to shift the AD curve to the left and the IA line downward.
B)raise interest rates to shift the IA line downward.
C)raise interest rates to shift the AD curve to the left.
D)lower interest rates to shift the IA line downward.
E)lower interest rates to shift the AD curve to the left.

Question

Quizplus · Accepted Answer

If the Fed believes that real GDP is above potential GDP, it is an indication of an overheating economy with high inflationary pressure. To combat this, the Fed would use contractionary monetary policy by raising interest rates to reduce consumer spending and business investment, which would shift the AD curve to the left, resulting in lower aggregate output and prices.

If the Fed Believes That Real GDP Is Above Potential