Question

After a meeting, the Federal Open Market Committee (FOMC) decides that the state of the economy warrants actions to increase real interest rates. a. As a result of the increase in real interest rates, consumption, investment, government spending, and net exports will all . b. With the increase in real interest rates, output will , inflation will , and unemployment will . c. Each of the following situations would cause the FOMC to consider increasing rates except one. The exception is a negative output gap and low inflation. high inflation and a large positive output gap. a large positive output gap. high inflation.

Answer 1

Answer: See explanation

Step-by-step explanation:

a. As a result of the increase in real interest rates, consumption, investment, government spending, and net exports will all (decrease).

When there is a rise in the interest rate, the coat if borrowing will increase as well, therefore, this will lead to the reduction in investment and consumption and there's also a reduction in the net exports.

b. With the increase in real interest rates, output will (decrease), inflation will (decrease) and unemployment will .(increase).

When the real interest rate increase, the output will reduce as well as inflation since there'll be reduction in demand for goods and services and hence unemployment rises.

c. The situation that can lead the FOMC to consider increasing rates include

• high inflation and a large positive output gap.

• a large positive output gap.

• high inflation

Therefore, the exception will be a negative output gap and low inflation.