Question

why choose d?

28. Recently, the Federal Reserve is considering raising the interest rate for the first time since 2006. Which of the following would result in the short run if the interest rate is increased? . A lower inflation rate I A decrease in the money supply I A higher unemployment rate a. I and b. Il and III c. Iand IlI d. I, II, and ill

Answer 1

1. when interest rate increases, people keep less money with them. they keep their money in banks to earn as much interest as possible. thus the money supply decreases as money is kept in banks and transaction demand of money decreases.

2. In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. With less spending, the economy slows and inflation decreases.

3. The Phillips curve is an economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship. The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. thus lower inflation means high unemployment.