If real GDP exceeds potential GDP, to move the economy to potential GDP the Fed
A)lowers the federal funds rate to increase potential GDP but not real GDP.
B)lowers the federal funds rate to decrease real GDP but not potential GDP.
C)raises the federal funds rate to increase potential GDP but not real GDP.
D)raises the federal funds rate to decrease both real GDP and potential GDP.
E)raises the federal funds rate to decrease real GDP but not potential GDP.

Question

Quizplus · Accepted Answer

When real GDP exceeds potential GDP, the economy is overheating. The Fed raises the federal funds rate to cool down the economy, which decreases real GDP by reducing spending and investment, but potential GDP remains unchanged.

If Real GDP Exceeds Potential GDP, to Move the Economy