Question

What is most likely to happen to the price level and real GDP if the Fed targets a lower Federal Funds Rate?

Select one:

a. Price level and real GDP will both increase

b. Price level and real GDP will both decrease

c. Price level will increase, but real GDP will decrease

d. Price level will decrease, but real GDP will increase

e. Real GDP will increase, but the price level would remain the same

Answer 1

Answer - D. Price level will decrease, but real GDP will increase.

Reason- The federal funds rate is the short term interest rate at which banks borrows money from bank to another.

A low federal funds rate implies expansionary monetary policy by a government.

The Taylor Rule is an interest rate forecasting model,

It suggests how central banks should change interest rates to account for inflation and other economic conditions.

And it says that fed should lower rates when inflation is below the target level or when GDP growth is too slow and below potential.

So if this answer helped please give it a thumbs up. Thank you ?