During the latter half of 2004 and the beginning of 2007, the Fed adopted a policy that consistently increased the federal funds rate. The most likely goal of this policy was to:
A)decrease inflation by decreasing aggregate demand.
B)decrease inflation by increasing aggregate demand.
C)increase output by decreasing aggregate demand.
D)increase output by increasing aggregate demand.

Question

Quizplus · Accepted Answer

The Federal Reserve likely increased the federal funds rate to decrease inflation by decreasing aggregate demand. Raising interest rates makes borrowing more expensive, which can reduce spending and investment, leading to lower aggregate demand and, consequently, lower inflation.

During the Latter Half of 2004 and the Beginning of 2007