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Using Aggregate Demand and Aggregate Supply,explain What Happens in the Short

question 87

Essay

Using aggregate demand and aggregate supply,explain what happens in the short run if the Federal Reserve raises interest rates in the economy.Be sure to detail what happens to aggregate demand,the price level,the level of GDP,and unemployment.Assume that the economy is at full employment before the interest rate increase.


Definitions:

ARM

Adjustable Rate Mortgage; a type of mortgage loan where the interest rate varies throughout the loan period based on an index.

Equity

The amount of a home that an owner actually owns.

Loan Balance

The amount of money that remains to be paid on a loan, excluding interest or fees that may accumulate.

Sales Tax

A percentage paid to the government of sales on products or services.

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