The Fed will raise the interest rate by the greatest amount when the economy is on the ________ part of the AS curve and there is ________.
A) flat; a decrease in government spending
B) flat; an increase in government spending
C) steep; a decrease in government spending
D) steep; an increase in government spending

Question

Quizplus · Accepted Answer

When the economy is on the steep part of the Aggregate Supply (AS) curve, it indicates that the economy is close to or at full capacity. An increase in government spending in this situation would likely lead to inflationary pressures because the economy cannot easily increase output to meet the higher demand. To combat these inflationary pressures, the Federal Reserve might raise interest rates by a greater amount to cool down the economy and prevent overheating.

The Fed Will Raise the Interest Rate by the Greatest