If aggregated demand is growing faster than potential output, then the Federal Reserve is likely to
A)lower interest rates because the rate of inflation is falling or is likely to fall.
B)raise interest rates because the rate of inflation is rising or is likely to rise.
C)raise interest rates because the rate of inflation is falling or is likely to fall.
D)lower interest rates because the rate of inflation is rising or is likely to rise.
E)do nothing because it is not clear how the rate of inflation will be affected.

Question

Quizplus · Accepted Answer

When aggregated demand is growing faster than potential output, it puts pressure on resources and can lead to higher inflation. In order to counteract inflationary pressures, the Federal Reserve is likely to raise interest rates in order to reduce borrowing and spending, which will slow down aggregate demand.

If Aggregated Demand Is Growing Faster Than Potential Output, Then