When Fed policy is addressing either a contractionary or inflationary gap, interest rates will be changed in the same direction as the intended change in real GDP.

Question

When Fed policy is addressing either a contractionary or inflationary gap, interest rates will be changed in the same direction as the intended change in real GDP.​

Quizplus · Accepted Answer

When addressing a contractionary gap, the Fed lowers interest rates to stimulate borrowing and investment, increasing real GDP. Conversely, to combat an inflationary gap, it raises interest rates to reduce borrowing and investment, slowing down real GDP growth.

When Fed Policy Is Addressing Either a Contractionary or Inflationary