Consumer confidence in the economy rises, and as a result, real GDP increases above potential GDP. To move U.S. GDP back to potential GDP, the Fed should

Question

Quizplus · Accepted Answer

When consumer confidence in the economy rises, leading to an increase in real GDP above potential GDP, it often results in inflationary pressures. To counteract these pressures and move GDP back to its potential level, the Federal Reserve (the Fed) would typically raise the federal funds rate. This action makes borrowing more expensive, which can cool down spending and investment, thereby reducing inflationary pressures and guiding the economy back towards its potential GDP.

Consumer Confidence in the Economy Rises, and as a Result