Question

Which of the following statements best describes what it means for the Fed to manage aggregate...

Which of the following statements best describes what it means for the Fed to manage aggregate demand?

If real and potential GDP were equal, the Fed would change interest rates even if the rate of inflation equaled the target rate of inflation.
The Fed changes interest rates only if the rate of inflation is deviating from the target rate of inflation.
If real and potential GDP were not equal, the Fed would change interest rates in order to prevent a deviation between the rate of inflation and the target rate of inflation.
The Fed changes interest rates only if the rate of inflation is higher than the target rate of inflation.
If real and potential GDP were not equal, the Fed would change interest rates only in those cases that would prevent the rate of inflation from rising above the target rate of inflation.
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Answer #1

Fed manages aggregate demand

d) Fed changes interest rate only if the rate of inflation is higher than the target of inflation.

Central bank changes the size of the money supply. Central banks have experimented with money growth over their target. Fed sells or lends Treasury securities to reduce the money supply. Change in monetary policy impacts demand through transmission mechanisms. This happens through the interest rate channel. Monetary policy impacts inflation through expectations. Change in policy rates feeds through to all other interest rates relevant to the economy.

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