Question

A possible reason that the Federal Reserve might raise interest rates in the economy is that __________.

	A.	there is a perception is that the economy is growing too strongly
	B.	there is a fear that inflation will begin to increase soon
	C.	there are some signs that wage gains are beginning to increase
	D.	the level of unemployment has dropped below the natural rate of unemployment
	E.	all of the above

Answer 1

Answer: E. All of the above

The Federal Reserve might raise interest rates if there is a high inflation in the economy. When the economy is growing too strongly, if there is a fear that inflation will begin to increase soon, if there are some signs that wage gains are beginning to increase, if the level of unemployment has dropped below the natural rate of unemployment, the Federal Reserve will raise interest rate. The rise in interest rate will decrease the money supply, and will raise the cost of borrowing capital and hence will decrease the investment. Thus, the rise in interest rate will reduce the inflation rate.