If the Fed wants to fight inflation, it will ____________the federal funds rate, which in the short run shifts the____________ .

Question

Quizplus · Accepted Answer

If the Fed wants to fight inflation, it will raise the federal funds rate. When the Fed raises the federal funds rate, it becomes more expensive for banks to borrow money, which means they will lend less to households and businesses. This decrease in available credit will decrease consumption and investment, which will shift the Aggregate Demand (AD) curve leftward, resulting in a decrease in output and prices in the short run, eventually reducing inflation pressures.

If the Fed Wants to Fight Inflation, It Will ____________The