Suppose the Fed pursues a policy that leads to higher interest rates in the United States.How will this policy affect real GDP in the short run if the United States is an open economy? This policy
A)reduces investment spending,consumption spending and net exports,all of which reduce GDP.
B)reduces investment spending and consumption spending,both of which reduce GDP.Net exports rise which increases GDP.
C)reduces investment spending and consumption spending,both of which reduce GDP.Net exports fall which increases GDP.
D)increases investment spending,consumption spending,and net exports,all of which increase GDP.

Question

Quizplus · Accepted Answer

Higher interest rates can lead to a reduction in investment spending as borrowing becomes more expensive. This, in turn, can lead to a reduction in consumption spending as lower investment may reduce income and employment opportunities. Additionally, higher interest rates may lead to increased demand for the US dollar, causing it to appreciate and making US exports more expensive for foreign consumers. This can lead to a reduction in net exports, further reducing GDP. As an open economy, the US is heavily dependent on trade, and changes in net exports can have a significant impact on overall GDP. Therefore, the best choice is A, which states that the policy will reduce investment spending, consumption spending, and net exports, all of which will reduce GDP.

Suppose the Fed Pursues a Policy That Leads to Higher