ECONOMICS
AGGREGATE DEMAND
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
Consumption increases, Real GDP increases
|
|
|
Consumption increases, Real GDP decreases
|
|
|
Consumption decreases, Real GDP increases
|
|
|
Consumption decreases, Real GDP decreases
|
|
|
Consumption has no change, Real GDP increases
|
Detailed explanation-1: -In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well. When real GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their factories and people have more money in their pockets.
Detailed explanation-2: -This will shift the AD curve inwards, and there will be a resulting contraction down the AS curve. Both price level and real GDP will fall. So, an increase in interest rates will-ceteris paribus-cause real GDP to decrease.
Detailed explanation-3: -Therefore, a decrease in interest rates causes a rise in real GDP and inflation. When the interest rate is already low (e.g. 0.5%), a decrease in the interest rate (e.g. to 0.25%) may not have the same affect on real GDP.
Detailed explanation-4: -Because higher interest rates mean higher borrowing costs, people will eventually start spending less. The demand for goods and services will then drop, which will cause inflation to fall. Similarly, to combat the rising inflation in 2022, the Fed has been increasing rates throughout the year.