Targeting interest rates can be procyclical because
A)an increase in income increases interest rates,causing the Fed to buy bonds,increasing the monetary base and money supply,leading to further increases in income.
B)an increase in interest rates increases income,causing the Fed to buy bonds,increasing the monetary base and money supply,leading to further increases in income.
C)an increase in the monetary base increases the money supply,causing the Fed to buy bonds,increasing the monetary base and money supply,leading to further increases in income.
D)an increase in income increases the monetary base and money supply,causing the Fed to buy bonds to increase interest rates and income.

Question

Quizplus · Accepted Answer

Increasing interest rates can cause an increase in income which in turn leads to an increase in interest rates. This can create a feedback loop where the Fed has to continue to buy bonds and increase the monetary base and money supply to counteract the rising interest rates. This procyclical behavior can lead to economic instability.

Targeting Interest Rates Can Be Procyclical Because