BUSINESS ADMINISTRATION
BUSINESS POLICY
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Buying securities
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Stimulating economic growth
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Lowering interest rates
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Raising interest rates
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Detailed explanation-1: -When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.
Detailed explanation-2: -As the theory goes, if it’s more expensive to borrow money or carry a balance on a credit card, consumers will spend less. When spending declines, demand will fall and, eventually, so will the price of everyday goods.
Detailed explanation-3: -This key interest rate impacts how much commercial banks charge each other for short-term loans. A higher fed funds rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money.
Detailed explanation-4: -“Raising interest rates helps to reduce the overall level of demand and therefore, hopefully, reduces the upward pressure on prices, ” says Gapen. So why might this cause a recession? In the long run, businesses may respond to consumers purchasing fewer goods and services by reducing production, explains Gapen.
Detailed explanation-5: -The Fed has several tools it traditionally uses to tame inflation. It usually uses open market operations (OMO), the federal funds rate, and the discount rate in tandem. It rarely changes the reserve requirement.