The Fed Delivers Biggest Interest Rate Hike in Decades to Combat Surging Inflation

The Federal Reserve escalated its battle against inflation with a 0.75% interest rate hike. Consumer prices are up 8.6% from a year ago. By sharply raising interest rates, the Fed hopes to tamp down consumer demand.—npr.org

Answer the following questions to check your understanding of the story.

1) How does the 0.75% interest rate hike influence the inflation rate?

When short-term interest rates rise, _____________, and the inflation rate falls.

a) the long-term real interest rate rises, which decreases saving, wealth and consumption expenditure

b) the long-term real interest rate rises, which decreases consumption expenditure and investment

c) the quantity of bank deposits increases, so consumers hold more deposits and spend less

d) the quantity of money demanded increases, so consumers hold more money and spend less

2) Other than combating inflation, what effect can we expect to see from the Fed’s decision to raise interest rates?

Everything else remaining the same, we can expect to see ______________.

a) an increase in investment up to a year later

b) the Fed increasing bank reserves over the next six months

c) a falling unemployment rate within one to two years

d) a decrease in the real GDP growth rate within one to two years

The Fed Delivers Biggest Interest Rate Hike in Decades to Combat Surging Inflation

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