The Federal Reserve lowers interest rates. As a result, in the short run, real GDP_____________ and the price level _____________.
A) decreases; rises
B) increases; falls
C) increases; rises
D) decreases; falls

Question

Quizplus · Accepted Answer

When the Federal Reserve lowers interest rates, it stimulates borrowing and investment which puts more money into circulation. This leads to an increase in aggregate demand and higher output. Real GDP, in turn, increases in the short run. Additionally, since output is increasing, firms raise their prices which leads to an increase in the price level. Therefore, the correct choice is C - real GDP increases and the price level rises.

The Federal Reserve Lowers Interest Rates