If the Fed is worried about increasing inflation and decides to raise the interest rate, real GDP will
A)remain above potential GDP if consumption is more responsive to changes in interest rates than the Fed expected.
B)come in below potential if potential GDP is higher than the Fed expected.
C)come in above potential GDP if some other factor acts to shift the AD curve to the left.
D)come in below potential if investment is less responsive to changes in interest rates than the Fed expected.
E)quickly return to potential GDP as the AD curve shifts to the left.

Question

Quizplus · Accepted Answer

Raising interest rates typically reduces consumption and investment, leading to a decrease in aggregate demand. If potential GDP is higher than expected, the actual GDP might fall below this potential level due to the reduced demand.

If the Fed Is Worried About Increasing Inflation and Decides