If the Fed is worried about inflation and raises interest rates, then in the short run
A)the aggregate demand curve will shift to the left.
B)the aggregate demand curve will shift to the left, and the inflation adjustment line will shift down because the target inflation rate has decreased.
C)the inflation adjustment line will shift down because the target inflation rate has decreased.
D)the inflation adjustment line will shift up because the target inflation rate has increased.
E)the aggregate demand curve will shift to the right.

Question

Quizplus · Accepted Answer

When the Fed raises interest rates to combat inflation, it becomes more expensive for individuals and businesses to borrow money. This reduces spending and investment, which in turn decreases aggregate demand. Therefore, the short-run effect of raising interest rates is the leftward shift of the aggregate demand curve.

If the Fed Is Worried About Inflation and Raises Interest