Strongest US Growth Since 2021

EconEye Admin

3 years ago

Gross domestic product is projected to have grown at an annual rate of 4.5% last quarter. The Fed has been trying to quell inflation by dampening demand while avoiding a recession. The Fed chief said that policymakers are likely to hold rates steady at their next meeting.—bloomberg.com

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

How does the Fed “quell inflation by dampening demand”?

The Fed ____________.

a) sets the long-term bond rate above the federal funds rate

b) buys securities and increases the quantity of bank reserves

c) implements a policy of inflation rate targeting

d) raises the federal funds rate and engages in quantitative tightening

Wrong! - What actions does the Fed take to slow the growth of aggregate demand?

Good Job! - To “quell inflation by dampening demand”, the Fed raises the federal funds rate and engages in quantitative tightening. The ripple effects of this policy eventually slow the growth rates of consumption expenditure and investment, aggregate demand growth slows, and the inflation rate falls.

Why is the Fed likely to hold rates steady?

The Fed is likely to hold rates steady because ____________.

a) it is the most popular decision with U.S. consumers

b) they want to wait for the economy to respond to the current policy without moving the economy into recession

c) the Taylor Rule indicates that the current interest rate is the interest rate that will result in a 2 percent inflation rate

d) they are unsure that raising interest rates further would have any effect on inflation

Wrong! - What would happen if the Fed raised interest rates further? Why isn’t the Fed planning to do this?

Correct! - Monetary policy operates with a lag. The Fed is likely to hold rates steady because it takes up to two years for the inflation rate to respond to a rise in the federal funds rate. Additionally, the Fed does not want to increase interest rates further and take the risk that the economy will move into recession.

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