If inflation is a threat, then the Fed will conduct monetary policy aimed at
A) increasing the interest rate which then will shift aggregate demand to the right.
B) decreasing the interest rate which then will shift aggregate demand to the right.
C) decreasing the interest rate which then will shift aggregate demand to the left.
D) increasing the interest rate which then will shift aggregate demand to theleft.

Question

Quizplus · Accepted Answer

When inflation is a threat, the Fed will conduct contractionary monetary policy, which aims to decrease aggregate demand and reduce inflationary pressure. This is achieved by increasing interest rates, which makes borrowing more expensive and reduces spending. The increase in interest rates will also shift aggregate demand to the left, as consumers and businesses will reduce their spending due to the higher cost of borrowing. Therefore, the correct choice is D, increasing the interest rate which then will shift aggregate demand to the left.

If Inflation Is a Threat, Then the Fed Will Conduct