When financial market analysts say that the Fed is "trying to cool off the economy," they are referring to the case in which the Fed
A)raises the target rate of inflation.
B)lowers the target rate of inflation.
C)raises the federal funds rate because aggregate demand is greater than potential GDP at the target rate of inflation.
D)raises the federal funds rate because aggregate demand is less than potential GDP at the target rate of inflation.
E)lowers the federal funds rate because aggregate demand is less than potential at the target rate of inflation.

Question

Quizplus · Accepted Answer

When the Fed raises the federal funds rate it makes it more expensive for banks to borrow money, which leads to an increase in interest rates for consumers and businesses. This decrease in borrowing and spending tends to slow down the economy and is known as "cooling off the economy." The Fed may raise the federal funds rate because aggregate demand is greater than potential GDP at the target rate of inflation.

When Financial Market Analysts Say That the Fed Is "Trying