When the economy is in recession, does the Fed want to raise the interest rate so as to increase aggregate demand and increase real GDP? Explain your answer.
When the
economy is in recession, does the Fed want to raise the interest rate so as to
increase aggregate demand and increase real GDP? Explain your answer.
Answer: When the economy is in a recession, the Fed wants to increase aggregate demand and hence GDP, but raising the interest rate is the wrong policy. A boost in the interest rate decreases consumption expenditure, investment, and net exports and therefore decreases aggregate demand. The proper policy for the Fed to pursue is a cut in the interest rate.
Answer:
ReplyDeleteWhen the economy is in a recession, the Fed wants to increase aggregate demand and hence GDP, but raising the interest rate is the wrong policy. A boost in the interest rate decreases consumption expenditure, investment, and net exports and therefore decreases aggregate demand. The proper policy for the Fed to pursue is a cut in the interest rate.