The Fed Fights Inflation

8 important questions on The Fed Fights Inflation

What occurs during an expansionary gap?

When actual output exceeds potential output, the economy is ‘overheating’.

What kind of spending occurs in an expansionary gap?

Planned spending exceeds sustainable production levels during an expansionary gap.

What happens to firms' inventory in an expansionary gap?

Firms face unplanned inventory declines as demand exceeds supply.
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What is the result if an expansionary gap persists?

Firms will raise their prices, leading to inflation.

How does the Fed respond to an expansionary gap?

To prevent inflation, the Fed intervenes to cool the economy down.

What action does the Fed take to raise interest rates?

The Fed raises interest rates to make borrowing more expensive.

How do higher interest rates affect consumption?

Higher rates decrease consumption by households and investment by firms.

What does decrease in interest rates lead to?

Decreases planned aggregate expenditure and equilibrium output.

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