If real GDP exceeds potential GDP,to move the economy to potential GDP the Fed
A)raises the federal funds rate to increase potential GDP but not real GDP.
B)lowers the federal funds rate to decrease real GDP but not potential GDP.
C)raises the federal funds rate to decrease real GDP but not potential GDP.
D)lowers the federal funds rate to increase potential GDP but not real GDP.
E)raises the federal funds rate to decrease both real GDP and potential GDP.

Question

Quizplus · Accepted Answer

When real GDP exceeds potential GDP, the economy is overheating, which can lead to inflation. The Fed raises the federal funds rate to cool down the economy by decreasing real GDP, bringing it closer to potential GDP without affecting potential GDP itself.

If Real GDP Exceeds Potential GDP,to Move the Economy to Potential