ECONOMICS (CBSE/UGC NET)

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: -How does raising interest rates tame surging inflation? In 2022, the Federal Reserve raised its key federal funds rate seven times-something it hasn’t done as aggressively since the 1980s. The central bank hopes that by doing so, it can slow down the economy enough to moderate price growth.

Detailed explanation-3: -The Fed used “open market operations” to pursue that target; that is, by selling (purchasing) securities, the Fed reduced (increased) the supply of bank reserves, thus leading to a higher (lower) federal funds rate.

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.