Question

If the Fed raises interest rates too​ soon, _______. A. the recovery will be too strong...

If the Fed raises interest rates too​ soon, _______.

A.

the recovery will be too strong and the inflation rate will be too high

B.

the recovery will be too weak and the unemployment rate will be too high for too long

C.

potential GDP growth will slow

D.

it will avoid the​ short-run tradeoff between unemployment and inflation

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Answer #1

When Fed raises interest rates, the cost of borrowing goes up too, and this starts a series of cascading effects. Banks increase their interest rates for businesses and consumers. Loans become expensive and it costs more to buy a good or finance a company. Workers would lose their jobs. The economy shows down as spending decreases. It can create recession in some cases. It keeps the cost of good constant and curtails inflation.

Answer: B. The recovery will be too weak and unemployment rate too high for too long.

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