If the Fed Believes That Real GDP Is Below Potential

question 108

Multiple Choice

If the Fed believes that real GDP is below potential GDP, it will

• A)lower interest rates to shift the AD curve to the right and the IA line upward.
• B)do nothing and wait for the IA line to shift and return real GDP to potential GDP at a lower inflation rate.
• C)lower interest rates to shift the AD curve to the right.
• D)lower interest rates to shift the IA line downward.
• E)lower interest rates to shift the AD curve to the right and the IA line downward.

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Definitions:

Utility Function

A representation in economics of how a consumer ranks different bundles of goods according to the level of satisfaction or utility they provide.

Auto Repairs

Services aimed at fixing or maintaining the functional aspects of vehicles, ensuring they are safe and operational.

Gasoline

A liquid fuel made from petroleum and used primarily to power internal combustion engines.

Cost Function

A mathematical representation that describes how costs incurred by a firm change with variations in the level of production activity.