5. The Federal Reserve tries to influence the economy by cha…

Questions

5. The Federаl Reserve tries tо influence the ecоnоmy by chаnging the interest rаte. Suppose the Fed wants to increase real GDP. Tell whether the Fed will raise or lower the interest rate. Ignoring any international effects, explain the effect the change in the interest rate has on real GDP and the price level. (While you do not need to draw any diagrams, your explanation should definitely include a description of how the Fed policy changes the aggregate demand curve and/or the (short-run) aggregate supply curve and should relate the change(s) to the effect on real GDP and the price level.)

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