Question

If businesses are producing at capacity, and the nation is experiencing almost full employment (a very low rate of unemployment - less than 2%), the Fed may decide to:

A. Lower interest rates.
B. Raise taxes.
C. Lower taxes.
D. Increase interest rates.

Answer 1

The correct answer to the following question is D) interest rates would be increased by the government when there is almost full employment in the economy.

Step-by-step explanation:

When in the economy, business are producing close to productivity and in the nation there is almost full employment , then it can be said that the economy is booming . Which means there is good amount of money supply in the economy and people are spending robustly and that means the demand is high , which ultimately tells that the prices of goods and services are high.

So to cut the prices, government will increase the interest rate which will lead to the increase in cost of borrowing, and that will cause decrease in money supply and demand will ultimately fall, which leads to decrease in prices of goods and services.