Suppose that the Federal Reserve has recently raised interest rates in the economy and there is a credible forecast that the Fed will again raise interest rates in the future. A manager who is IS-MP savvy will expect that:
A)the cost of borrowing will decrease in the future.
B)interest rates will fall in the near future.
C)GDP in the economy will fall and sales will decrease in the future.
D)GDP in the economy will rise and sales will increase in the future.

Question

Quizplus · Accepted Answer

When the Federal Reserve raises interest rates, it becomes more expensive for businesses and consumers to borrow money. This typically leads to a decrease in spending and investment, which can cause GDP to fall and sales to decrease. The expectation of future rate hikes reinforces this outlook.

Suppose That the Federal Reserve Has Recently Raised Interest Rates