ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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There are no economic conditions that lead to inflation
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Inflation may result when the supply of money grows faster that the production of goods and services
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Inflation may result when the demand for money grows faster that the production of goods and services
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Inflation may result when the supply of money grows slower that the production of goods and services
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GDP falls below 2% for the year
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Detailed explanation-1: -More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, this leads to an increase in inflation.
Detailed explanation-2: -Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services.
Detailed explanation-3: -As a result of an increase in the growth rate of the money supply: real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run.
Detailed explanation-4: -If the Fed increases the interest rate of reserves, banks will want to keep higher reserves. This will reduce the money multiplier as higher reserves effectively mean a higher reserve ratio. A fall in the money multiplier will reduce the loans given out by banks, reducing the money supply.