A) increase the interest rate from 8 percent to 10 percent.
B) decrease the interest rate from 8 percent to 4 percent.
C) decrease the interest rate from 8 percent to 6 percent.
D) maintain the interest rate at 8 percent.

Question

A) increase the interest rate from 8 percent to 10 percent. 
B) decrease the interest rate from 8 percent to 4 percent. 
C) decrease the interest rate from 8 percent to 6 percent. 
D) maintain the interest rate at 8 percent.

Quizplus · Accepted Answer

According to the Phillips Curve, there is a trade-off between unemployment and inflation. Decreasing the interest rate would stimulate the economy and decrease unemployment, but it would also increase inflation. On the other hand, increasing the interest rate would reduce inflation but also increase unemployment. Therefore, maintaining the interest rate at 8% is not the best choice. Decreasing the interest rate from 8% to 4% would lead to a high inflation rate, and increasing the interest rate from 8% to 10% would lead to high unemployment rates. Therefore, the best choice is to decrease the interest rate from 8% to 6% as it strikes a balance between inflation and unemployment.

A) Increase the Interest Rate from 8 Percent to 10