From an initial long-run macroeconomic equilibrium,if the Federal Reserve anticipated that next year aggregate demand would grow significantly faster than long-run aggregate supply,then the Federal Reserve would most likely
A)increase income tax rates.
B)decrease income tax rates.
C)increase interest rates.
D)decrease interest rates.

Question

Quizplus · Accepted Answer

If the Federal Reserve anticipates that next year aggregate demand would grow significantly faster than long-run aggregate supply, it would most likely increase the interest rates as it would discourage borrowing and spending, which would reduce aggregate demand. This is a contractionary monetary policy aimed at reducing inflationary pressures that may arise due to a demand shock. Increasing tax rates is a fiscal policy measure that is less effective in controlling inflationary pressures in the short run. Decreasing tax rates or interest rates would further fuel aggregate demand and exacerbate inflationary pressures.

From an Initial Long-Run Macroeconomic Equilibrium,if the Federal Reserve Anticipated