If the output gap is negative, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influence short- and long-term interest rates _____, and _____ total spending in the economy.
A)lower; downward; decrease
B)lower; downward; increase
C)raise; upward; increase
D)raise; upward; decrease

Question

Quizplus · Accepted Answer

When the output gap is negative, indicating that actual output is below potential output, the Federal Reserve aims to stimulate the economy. It does so by lowering the federal funds rate, which influences both short- and long-term interest rates to move downward, ultimately aiming to increase total spending in the economy.

If the Output Gap Is Negative, Then the Federal Reserve