When inflation is rising, the Fed will
A)lower nominal interest rates to increase potential GDP and bring it in line with aggregate demand.
B)raise nominal interest rates to reduce aggregate demand.
C)raise nominal interest rates to stimulate spending.
D)lower nominal interest rates to stimulate production and bring it in line with aggregate demand.
E)raise nominal interest rates to stimulate production.

Question

Quizplus · Accepted Answer

When inflation is rising, the Fed will aim to reduce aggregate demand since inflation is caused by excess demand in the economy. One way to do this is by raising nominal interest rates, which increases the cost of borrowing and discourages consumers from spending and businesses from investing. This helps to slow down the economy and reduce overall demand, which can help to bring inflation under control.

When Inflation Is Rising, the Fed Will