In the short run, if the central bank increases interest rates, then consumption and investment ______,
Aggregate demand ______, and short-run equilibrium output _______, but potential output is
________.

Question

Quizplus · Accepted Answer

When the central bank increases interest rates, borrowing becomes more expensive, which typically leads to a decrease in consumption and investment. This, in turn, decreases aggregate demand, leading to a decrease in short-run equilibrium output. However, potential output, which is determined by factors like technology and the labor force, remains unchanged in the short run.

In the Short Run, If the Central Bank Increases Interest