Explain using aggregate demand and aggregate supply, what happens in the short run if the central bank raises interest rates in the economy. Be sure to detail
what happens to aggregate demand, the price level, the level of GDP, and unemployment. Assume that the economy is at full employment before the interest
rate increase.
Question:
Choose the correct word from the brackets and rewrite the below statement. Make sure to Bold the correct word in your statement. Each correct response carry
0.5 Mark
As interest rate will increse and interest costs are part of the cost of borrowing and as they [rise; decline], both firms and households will [increase, cutback] on
spending. This shifts the aggregate demand curve to the [right, left]. This [lowers; higher] equilibrium GDP [below; above] potential GDP. As production
[falls; rises] for many firms, they begin to [hire; layoff] workers, and unemployment [falls; rises]. The [declining rising] demand also [increases; lowers] the
price level. The economy is in recession.