Federal Reserve Hikes Interest Rates for the Fourth Time This Year

EconEye Admin

4 years ago

The three-quarters of a percentage point interest rate hike comes as Fed officials face a tough balancing act—bringing down rising prices amid growing concerns of an economic downturn. President Biden said that the U.S. is not going to be in a recession.—cbsnews.com

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

Why does the interest rate hike create a tough balancing act for the Fed?

The interest rate hike _____________, and creates a tough balancing act for the Fed.

a) decreases aggregate demand, which lowers the price level but also decreases unemployment

b) increases aggregate demand, which increases real GDP but also raises the price level

c) decreases short-run aggregate supply, which decreases unemployment but also raises the price level

d) decreases aggregate demand, which lowers the price level but also decreases real GDP

Wrong! - What is the effect of an interest rate hike on consumption expenditure and investment? Does aggregate demand change or does short-run aggregate supply change?

Good Job! - The interest rate hike deceases consumption expenditure and investment, and aggregate demand decreases. The AD curve shifts leftward. The price level falls and real GDP decreases.

The United States experienced negative real GDP growth in the first quarter of 2022. What must happen in the second quarter of 2022 if President Biden is correct that the United States will not be in a recession?

The United States will not be in a recession in the second quarter of 2022 if _____________.

a) the unemployment rate remains low

b) the price level rises at a slower rate than it rose in the first quarter

c) the growth rate of real GDP is negative but closer to zero than in the first quarter

d) real GDP in the second quarter is greater than real GDP in the first quarter

Wrong! - What is a recession? How does real GDP change when the economy is in a recession? Is a recession defined by changes in the price level? Can a recession occur when the unemployment rate is low?

Correct! - A recession occurs when real GDP decreases for two successive quarters. If real GDP in the second quarter is greater than real GDP in the first quarter, then the United States is not in a recession.

Share this: